Crafting the Perfect Pay Raise Strategy for Your Organization

As 2024 comes to a close, employers are preparing for the challenges and opportunities of the upcoming year. Among these is a critical issue: determining how to handle pay raises.

Compensation decisions have far-reaching implications for employee morale, retention, and organizational success. With 2025 just around the corner, now is the time to evaluate your approach.

Trends in Pay Raise Budgets

According to Payscale’s 2024-2025 Salary Budget Survey, which analyzed 1,550 submissions from employees across the U.S. and Canada, U.S. employers plan to increase their salary budgets by 3.5% in 2025. This is a slight dip from the 3.6% increase projected for 2024.

If your organization prioritizes pay equity and transparency, it’s essential to weigh the many factors involved in crafting a fair and effective pay raise strategy.

The Case for Standardized Criteria

How employers determine and communicate pay raises can significantly influence employee morale and performance. To avoid confusion and foster fairness, consider establishing standardized criteria for raises based on specific roles or job groupings.

If you already use standardized criteria, ensure they’re reviewed and updated regularly to stay relevant. By taking this approach, you can:

• Reduce inequity: Standardized criteria help minimize variations in compensation among employees performing similar roles.
• Promote fairness: Employees are more likely to feel valued when pay reflects performance consistently.
• Minimize bias: Clear, objective standards can diminish both the perception and reality of bias in pay decisions, protecting your employer brand and boosting morale.

Performance vs. Longevity: Striking the Right Balance

Even with standardized criteria, many organizations wrestle with whether to base pay increases on performance goals, longevity, or a combination of the two.

• Longevity: Rewarding employees for their tenure remains a traditional approach. Longevity-based raises acknowledge dedication, consistency, and institutional knowledge, which can also reduce turnover. However, tenure alone doesn’t always equate to high performance or adaptability to changing organizational needs.
• Performance Goals: Many employers are shifting to a performance-driven model. Tying raises to measurable, mutually agreed-upon goals ensures employees are rewarded for their contributions and encourages skill development. Be sure to make goals clear, attainable, and aligned with organizational objectives.
• Blended Approach: For some employers, a combination of performance and longevity strikes the right balance. Whatever method you choose, ensure your compensation policies align with legal requirements and seek legal counsel if needed.

Timing and Flexibility in Pay Raises

Most organizations link pay raises to annual performance reviews, but this isn’t the only viable schedule. For roles prone to high turnover, offering a modest raise after the first few months of employment may boost retention.

It’s also critical to address ad-hoc raise requests. Whether your policy is to assess these on a case-by-case basis or to discourage them entirely, ensure consistency and transparency. If a raise isn’t possible, consider nonfinancial incentives such as flexible working arrangements, professional development opportunities, or enhanced job titles.

Navigating Compensation Complexity

Developing an equitable, competitive, and transparent pay raise strategy is more complex than ever. However, a thoughtful approach to compensation can strengthen your organization’s ability to attract and retain top talent.

Need assistance analyzing your organization’s compensation strategy? Contact us to evaluate your compensation costs and the potential impact of annual or more frequent pay adjustments.