Annual pay rises are pretty standard in some larger companies, but for smaller businesses this approach might not always be affordable – or appropriate. That doesn’t mean you won’t ever face the prospect of salary increases though, so in this article, we’ll look at reasons why you might (or might not) award a pay rise.

Unless it’s written in their contract, you’re not actually under any legal obligation to give your employees a pay rise as long as their pay meets minimum wage requirements.

As their employer it’s entirely up to you whether or not you’ll consider pay rise requests. That said, it’s certainly worth scheduling in regular reviews – even if it’s just for your own benefit, to keep an eye on things.

Like all business decisions, there are good reasons to do, or not do, something. The rationale for agreeing what to pay someone can change depending on circumstances, but increasing someone’s salary usually relates to employee retention, rewards, or growth. For instance:

• They consistently generate leads or sales, and contribute towards bringing in revenue
• You’ve given them more responsibility, or they’re performing above their remit
• They demonstrate long-standing loyalty and dedication to your business
• Your employee shows outstanding potential for the future
• Their skills, knowledge, or experience are critical to the success of the business, and add value in a way that would be damaging if they went to a competitor, or would be difficult to replace

If your employee is ticking off any of these, they might well be a keeper! Rewarding deserving staff can be great for a business, improving staff retention, employee satisfaction and morale, and garnering loyalty. It also reduces the resources you need to spend on recruitment.
 

Having a written policy or process in place that you can refer will help you take a more logical, impartial approach to considering requests for a pay raise.

 
Having a chat about it will help you understand their motivations. For instance, is a rival firm advertising a similar role for more money, or do they have new responsibilities or qualifications? An in-person chat can sometimes help break down the barriers (but having things in writing is always useful!).

Whatever your response, it’s extremely useful to explain the reasoning behind your decision. For the long-term, put a plan of action in place. Outline targets they need to hit or new skills to acquire in order to level-up. Putting a framework and date on the plan will make it real for both of you.

Whilst you might be thinking “I can’t afford to lose them”, can you actually afford to pay them more? As well as paying a higher wage, the employer’s contributions you make on top of their salary will also increase.

For instance, pension contributions, and employer’s National Insurance contributions, amongst others that might apply. They’re all additional costs to take into careful consideration before signing on the dotted line.

What if I can’t afford to give my staff a pay rise?

It would be far worse to agree a pay rise which you can’t really afford, only to struggle with the consequences. You’ll compromise your mental wellbeing, but also put your business and cash flow at risk.

Sometimes, sad as it is, an employee pay rise can’t be your first priority. If you need to focus your spending elsewhere, explain why. Overpromising and under-delivering will cause problems in the future, but failing to discuss this with staff can damage morale and motivation.

Next stop: arrange a meeting with your accountant

Your accountant will be able to guide you through the long-term implications of awarding that pay rise, and whether or not your business is likely to be able to sustain it. Situations like this are precisely why we always advise keeping your records up to date!

Running a business can be stressful, and there may well be situations that are out of your control. If you can’t afford to issue a raise at the moment, there are still other options to explore.

If you’re not yet in a position to award staff with a salary increase, or simply want to boost morale, there are other ways to show your appreciation. Think outside the box! This might look like:

• An extra day of paid holiday
• An early finish
• Flexible working hours, or working remotely
• Allow them to take their birthday off, free of charge
• Training programmes in skills they wish to acquire
• Staff benefits, such as gym memberships (just don’t forget to report any taxable benefits to HMRC!)

…and that’s just the tip of the (generalised) iceberg! Consider the bigger picture - wanting to keep your workforce happy is not a bad thing. In fact, it’s a very desirable trait for an employer to have, but awarding rises might not always be the only option.

Learn more about our online accounting services for businesses. Call 020 3355 4047 to chat to the team, and get an instant online quote.