How to determine salary increases for employees
Performance 4 minute read

How to determine salary increases for employees

Andra Mircioiu | October 22, 2020

Completing employment evaluations and knowing how to determine salary increases is an important part of HR and manager’s roles. We break down the different types of salary increases and how to determine what will work best for you and your employees.

The recently released 2021 Salary Projection survey, undertaken by Canadian HR consulting firm Morneau Shepell, found that “in 2020, 36% of organizations froze their salaries compared to a forecast of 2.0%. For 2021, 13% of organizations plan to freeze their salaries. In addition, 46% of organizations are undecided about whether to increase or freeze salaries for 2021.” 

For 2021, the survey also projects an “average base salary increase of 1.9%”, further broken down to “a projected average base salary increase ranging from 0.6% to 3.0%”. 

What the data shows is that the COVID-19 global pandemic continues to create economic uncertainty, with many organizations unsure how and if to offer pay increases. 

Typically, the factors determining salary increases are revenue, cost of living, performance reviews, and any adjustments needed to achieve internal equity. However, COVID-19’s impact on the economy has also impacted management and employees, with many organizations needing to reduce hours or temporarily lay off staff to remain operational.

The news isn’t all bleak, however. As reported by Toronto Storeys, “Canadian business insolvencies were down 31.3% in the second quarter [of 2020] compared to the first quarter and by 37.7% compared to the same quarter last year.” 

If your organization is able to offer an annual salary increase for either 2020 or you’re planning ahead to 2021, continue reading for insights into how to use employment evaluations and cost-of-living information to determine salary increases. 

As defined by Investopedia, cost of living (or COL) is the ‘amount of money needed to cover basic expenses such as housing, food, taxes, and healthcare in a certain place and time period.’

A COL raise is typically an annual raise, intended to help offset the cost of inflation. Usually, COL raises are done on a percent increase, normally 2% of the current annual salary, at the end of the fiscal year. However, there are factors that can affect how you determine salary increases. As we’ve just seen, some organizations have implemented salary freezes for 2020—and possibly 2021—due to the COVID-19 pandemic. As an alternative to salary freezes, you could also reduce the increase to 1.5% or 1%, which helps cut costs but still shows employees that you’re prioritizing them.

As with any issues affecting employees, it’s important to remain transparent and promptly communicate any salary decisions. If your company is almost sure it’s unable to give out cost-of-living raises this year, let your employees know as soon as possible so they can plan their finances accordingly. 

Even if you’re not able to increase wages, you can still help your employees improve how they manage their personal finances. A 2019 survey conducted by the Canadian Payroll Association (CPA) found that 43% of Canadian employees report feeling so financially stressed that their productivity and performance at work suffers. CPA also estimates that “financial stress deducts nearly $16 billion a year in lost productivity from the Canadian economy—and that's a very conservative estimate.” 

Also worth sharing with your employees? This list of resources from The Financial Consumer Agency of Canada (FCAC), meant to help Canadians manage their money, debt and investments—with a section dedicated to COVID-19 and managing financial health in challenging times

If an employee’s performance has been exemplary or they’ve taken on additional responsibilities, you can acknowledge their contributions through what’s known as a merit raise.

If a merit raise is not financially feasible in current circumstances, you could consider a bonus (either a lump sum or quarterly instalments) to reward and retain your high-performing employee. 

Further to that, if an employee has recently gained new knowledge or skills that benefit your organization, you should consider rewarding their effort with either a pay raise or a bonus. 

However, it’s important to note that not all employees are good at tooting their own horn and informing their managers of valuable new skills. Ask during a weekly 1:1 or a remote performance review to gauge how many of your employees have gained new credentials—and how many would like to. 

If at all possible, offer a learning and development stipend that covers the cost of online courses, webinars, etc. to help further encourage your employees. 

Want more insights into salary? Download our FREE ebook, Paying It Forward: Your Guide to Employee Compensation to learn more about employee compensation, including how to determine base pay and how to decode average salary data and market rates—plus what else you can offer employees instead of money. 

Give your employees, and yourself, the experience we all deserve.

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