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The Importance of a Pay Raise Budget

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Offering competitive wages and benefits can help companies attract and retain the most qualified employees. Annual increases are an expectation for most workers and likely necessary to help keep up with inflation. Even small companies may need to establish a pay raise budget to reward and retain their best employees.

Calculate Competitive Pay Raises

Pay raises are usually doled out once per year, often as a percentage of current salary. For budgetary planning purposes, employers should factor pay raises into their annual budget as an average percentage of current year salaries. To determine an appropriate percentage increase, a study of benchmarks can provide support. One source of data is the Bureau of Labor Statistics, which issues reports tracking increases in the employment cost index for both the public and private sectors. Other competitive salary information can be found in industry surveys, compensation trends reports and even online career search websites. Regional costs of living are also a factor that should be taken into consideration when looking at national data.

Importance of Retention

Once employees are hired, companies invest in training and educating staff members on new systems and work processes. If an employee leaves, the benefit of this investment is lost. While small business owners may balk at the expense of increasing salaries, the costs of employee attrition are also significant. Retaining the best employees often means paying them slightly above the market average, which may be far less than the cost of training a new employee.

Non-Monetary Benefits Small Companies Can Offer

For small companies that simply cannot afford to match larger competitors' salaries, think about what can be offered to employees in the form of non-monetary perks or benefits. Flexible scheduling and telecommuting are popular work options on the wish list of many employees. The relaxed atmosphere of a small company is another important factor employees may prefer. Some employees are also willing to work for less in exchange for doing a job they love and gaining experience in a chosen field. Offering an ownership stake in the company is another way to attract and retain a key employee. In hiring and retention situations, small business owners should have a clear picture of what makes their company special and be able to communicate this to employees.

For many small companies, payroll is one of the largest expenses. By calculating a pay raise budget as part of an annual plan, companies can better meet the expectations of employees and limit employee turnover costs. Using an online accounting system, line-item expense analysis can be performed and the effect of pay raises can be calculated to ensure they are in line with company goals and profitability.


This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.