Using Base Wages to Give Raises

April 13, 2006

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Before you can determine what a fair raise is for a current employee, you should compare what others are paying for the same job by doing some research. This research shouldn't occur only when you bring in a new employee. You should look at market conditions for your employees at least every two years.

To make sure you stay competitive as an employer and retain your best employees, you'll have to keep on top of pay issues to make sure what you're paying is in line with the market for your area, your industry, and your job.

Once you're convinced that your employees' pay is about what it should be for their occupation, if you have more than one employee, examine the pay equity within your business.

Pay compression. Do you have people who just joined the company that are making the same amount as people who have been there for years, but because of inflation the long-time employees' salaries did not keep pace with starting salaries of today? If this is the case, your company may be suffering from a problem common in business today called pay compression.

How do you combat pay compression? If senior employees find out that newcomers make as much as they do, you'll have problems with morale. Clearly, the only way around this problem is to make sure that long-term employees are paid more than newly-hired employees. If market conditions require that you give new employees more pay, you'll have to give older employees at least a little more as well.

Some business owners have the philosophy that raises should be linked strictly to the performance of the employee and that employee's contribution to the success of the business. If that's how you feel, you probably will not put as much credence in the idea that employees with more time in the business should make more than newcomers. In that case, focus on linking pay with performance.