Despite your best efforts to develop a competitive compensation program, there may be times when employees try to negotiate their pay. Currently, inflation pressures and a tight labor market may prompt more employees to ask for an increase in pay. Here are some helpful hints for preparing for and handling these types of situations:
Consider taking these steps before an employee asks for a pay raise.
#1: Understand applicable laws.
There a number of laws governing pay, some of which may impact how you handle salary negotiations and/or develop your compensation program, including:
- Minimum wage and overtime: Federal law requires employers to pay non-exempt employees at least the minimum wage per hour and overtime whenever they work more than 40 hours in a workweek. Numerous state and local laws may have higher minimum wage requirements and may require overtime under additional circumstances.
- Nondiscrimination: Federal law and many state and local laws prohibit discrimination in pay (and other employment practices) based on race, sex, age and other protected characteristics. Audit your pay practices regularly to ensure they are equitable and any disparities in pay are justified and lawful.
- Pay history: Under the theory that it could perpetuate pay discrimination from a previous employer, some jurisdictions prohibit employers from asking about or using an applicant's pay history to make pay decisions.
- Pay discussions: Federal law and some state laws give employees the right to discuss their pay with co-workers. Avoid rules or other actions that could be perceived to restrict this right.
#2: Have a compensation philosophy.
Your compensation philosophy should aim to attract, motivate and retain talent, while keeping labor costs under control. Job offers and employee communications should highlight total compensation, addressing both direct compensation (wages, salaries, commissions and bonuses) and indirect compensation (health insurance, paid time off, retirement plans). For example, your company might emphasize competitive base salaries with benefits that help employees maintain a healthy work-life balance.
#3: Know the market.
Know what your competitors pay employees in similar positions. Review external salary data from the federal Bureau of Labor Statistics (BLS) or industry groups and vendors. Having an accurate picture of the market can help you establish competitive pay rates and respond to employees who contend that they are underpaid.
Additionally, understand inflation in your market. Inflation is generally defined as the overall upward price movement of goods and services in the economy. One way the BLS tracks inflation is via its Consumer Price Index for Wage Earners and Clerical Workers (CPI-W). The CPI-W measures the costs of a selection of consumer goods and services over a given time period among these workers. The BLS then reports data for the country as well as various geographic areas. For instance, the CPI-W for the United States increased 9.8 percent from June 2021 to June 2022, according to the BLS. By contrast, most employers raised their employees' pay by less than that during the same time period, so employees may feel like they are making less because their wages aren't going as far.
#4: Give your compensation program structure.
Establishing salary ranges for a job or a classification of jobs can help provide structure for job offers and pay increases. Within this range, salary determinations should take into account the candidate's education, skills and job-related experience. You should also account for external equity (when compared with employees at other companies) and internal equity (when compared with other employees in your company), and factor in the job duties and the level of expertise required for the job.
#5: Be open about pay practices.
Communicate your compensation philosophy and let employees know how their pay is determined. Encourage employees to ask questions about your company's compensation plan.
#6: Conduct "stay" and exit interviews.
"Stay interviews" can help you gain insight into how you can retain employees. Ask current employees questions that address both why they're loyal to the company (an indication of what you should keep doing) and why they may consider leaving (an indication of what changes may need to be made). These interviews typically include questions about what the employee likes most and least about their job, what the employer/supervisor can do to support them in the challenging aspects of their job, whether they believe their talents are being fully utilized, and what would make them consider leaving.
If you do receive notice from any employee that they're leaving, conduct an exit interview with them to find out why they resigned. Exit interviews can help you identify your company's weaknesses, so they can be addressed before the next employee leaves.
#7: Consider whether companywide adjustments are prudent.
Based on the information you gather in the steps above, consider whether it makes sense to make changes to your compensation program on a companywide basis before individual employees ask for them. Even if you cannot provide pay increases companywide, consider other options, such as:
- One-time bonuses. Many employers offer one-time retention and/or performance bonuses, which, unlike increases to base pay, only impact their bottom line in the year they are given. If a one-time bonus is within your budget, it can be an attractive alternative to a pay raise.
- Flexible work arrangements. One of the largest increases in consumer prices has been in gasoline (up about 50 percent in the past 12 months, according to the BLS). Allowing employees to work from home (full-time or only on certain days) can help reduce the costs of commuting. Another option is allowing alternative start and stop times to employees, which can give them the ability to commute when there is less traffic congestion and therefore use less gas.
- Gift cards. Employers can provide employees with gift cards to purchase gas, food and other items. Keep in mind gift cards and similar items that can easily be exchanged for cash are typically considered taxable wages, regardless of the amount (see IRS Publication 15-B).
Here are a few steps to consider taking if an employee asks for a pay increase.
#1: Listen to the employee.
If an employee asks for an increase in their pay, take the request seriously. If necessary, ask clarifying questions (e.g., "how much of a raise are you seeking?" or "what prompted you to request a pay raise?"). Avoid making promises about future pay increases. But, you can let the employee know you will consider their request. If the employee complains that a co-worker is getting paid more, talk about how the company determines pay rates and the various ways employees can earn higher pay (such as merit-based increases, job-specific licenses/certifications, or by acquiring new skills).
Note: If the employee alleges potentially discriminatory pay practices, you should consult legal counsel to determine next steps.
#2: Consider options.
After meeting with the employee, consider whether it makes sense to meet the employee's request, whether fully, somewhere between their current and desired pay, or to make no change at all. Take into account such factors as the market, your budget, the likelihood the employee will stay and for how long. Also, consider if the employee left, the impact it would have on co-workers and your company, and how difficult it would be to replace the employee. If a pay raise isn't the right move for your company, consider whether another option is (see #7 above).
Keep in mind that the practice of salary/benefits negotiations may lead to potential inequities. For example, without proper controls, high performers who don't negotiate could receive fewer perks than employees who do negotiate. Make sure your process is equitable and develop guidelines, such as negotiating within the salary range, or making changes to all similarly situated employees. Further, decisions should be reviewed by more than one individual, such as the manager and a member of senior leadership, to ensure internal equity and alignment with your compensation program.
There also may be situations where a promotion is warranted, so the employee receives an increase in pay but takes on greater responsibilities. In such cases, make sure the pay increase reflects the additional work responsibilities.
#3: Inform the employee.
Communicate your decision to your employee in person and in writing. For instance, if you are giving them their requested pay increase because of market conditions or merit, clearly state so. If you are giving them less than they requested, let them know why, and that the decision will be re-evaluated annually (if applicable).
Review your compensation program regularly to ensure it is meeting your business needs and complies with applicable laws. Additionally, be prepared to handle requests for raises, especially if inflation remains higher than average and/or the labor market remains tight.