How Do Organizations Determine Pay Raises for Employees?

A raise is an increase in the amount of hourly pay or salary that an employee receives for work performed in an organization. Organizations provide raises for employees in a number of different ways and for a variety of reasons. A raise is considered a positive event because it increases the employee's take-home pay and spending power. 

How Does an Organization Give Employees a Raise?

Following are ways in which organizations increase employee pay by giving pay raises. 

• Some organizations assign raises based on an employee's review in an annual performance appraisal. This type of raise is often assigned based on an employee's performance ranking on the review (1-5, for example, with a percentage of pay increase assigned to each numeric rating).
  This type of raise is subjective as the manager's opinion is often the chief determiner of the employee's increase. Some organizations have gone to great lengths to remove the weight of the manager's opinion in the mix. They have devised elaborate, time-consuming to create, systems for selecting each number. For example, to earn a 5, the employee must have accomplished these ten items.
• Other organizations distribute raises, such as a 2.5% cost of living raise, equally to all employees either annually or bi-annually. This type of salary increase does not motivate employees to improve their performance or foster employee engagement. When all employees get the same increase annually, why excel?
• A contract can require a raise for employees based on factors established in the contract, such as contracts in union-represented workplaces. It is generally negotiated and raises are clear-cut, based on the compensation system negotiated.
  Once again, when employees receive the same raise, the raise fails to motivate and reward your organization's best performing employees. Your best employees resent that they are compensated at the same rate as people who are performing less effectively.
• Government and other nonprofit organizations may have raise requirements that are clearly spelled out for all employees and based on employee longevity, organizational pay grades, and job requirements and responsibilities within the pay range.
  This payment system affords an employee a path to making more money via promotions, lateral moves, and expanded job responsibilities. But, it is still not as motivational or rewarding as a raise based on merit. 
• A raise can reward an employee's contributions. An employee can also make a contribution that is so significant that he is given a raise in recognition of the contribution. It can also result in an employee's successful salary negotiation. Outside of the organization's usual salary review timetable, successful salary negotiation is often the result of significant contributions.
• Finally, some organizations attempt to assign a raise to each employee based on the employee's performance and contribution during the time period covered. This form of merit increase or merit raise is increasingly important in the private sector. It is recognized as a way to attract and keep the best employees while encouraging people who aren't contributing to a rise of zero.
  When employers actually give raises of zero dollars, they have additional dollars in the salary budget to give extra to the strongest contributors.

An employee, particularly in the private sector, can request a raise when the employee believes that his or her work contributions merit an increase in pay. A raise also generally accompanies an employment event such as a promotion, lateral move, special assignment, or team leadership role, to cite several examples of job changes/enhancements that trigger a raise.