In some large companies, annual salary raises are a given. For small businesses or start-ups though, this approach isn’t always affordable, but that doesn’t mean you’ll never face the prospect of pay rises for your employees. In this article, we’ll look at reasons why you might (or might not) award a pay rise, factors to consider, and who might be able to help.

Why should I give my employee a pay rise?

As with all business decisions, there are always good reasons to do, or not do, something – including granting pay rises to staff. The rationale can change depending on circumstances, but increasing someone’s salary usually relates to employee retention, rewards, or growth.

• 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 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. You can foster a happier, more motivated workforce, whilst limiting the time, effort, and money spent on recruitment.

What should I consider before agreeing to a pay rise?

Don’t press go on a pay rise just yet – there’s more to think about. Whilst you might be thinking “I can’t afford to lose them”, can you actually afford to pay them more?

Have you thought about employer contributions?

It’s not just the employee’s wage you need to think about, there are also your employer contributions that come on top of any staff salary.

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.

Check out our salary calculator to work out the cost of hiring staff or awarding them a pay rise. It will help you compare how much your employee costs now, versus how much they will cost on their proposed new salary.

Does it sit within the salary guidelines?

A new set of salary guidelines is released each year, advising on pay brackets in alignment with various roles and responsibilities. It’s worth consulting these guides beforehand to check that your employee’s wage reflects their role adequately.

Is your business in need of a cash injection elsewhere?

Sometimes, sad as it is, an employee pay rise can’t be your first priority. If you do find yourself with some available cash but know it could be used more constructively elsewhere, you should probably put the raise on hold for the time being. It’s worth having a chat with your employee about this though, so they understand your thinking.

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 those accounts and bookkeeping up to date!

When you’re dealing with well organised financial records it’s much easier to get a clear picture of your business’s financial health. And yes, ok, we’re accountants so we’ll always advise it, but it’s well worth keeping in contact with your accountant on a regular basis.

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

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.

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.

When your employee requests a pay review

If your employee has requested a review and you can’t afford it (or don’t feel it appropriate just yet), honesty and transparency is always the best policy here. Overpromising and under-delivering might land you in hot water later on, but failing to discuss things with your staff can tarnish morale and motivation.

Explain what else is going on in the business so they’re not left second-guessing a flat no. For the long-term, put a plan of action in place. Outline targets they need to hit or new skills to absorb in order to level-up. Putting a framework and date on the plan will make it real for both of you.

Other ways to show your appreciation to staff

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 about the tax and NI!)

…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 be the solution for you. Get some advice from your accountant or payroll provider about the true cost of employer contributions or other benefits.

We know running a business isn’t easy at times. Talk to one of the team about our online accountancy services by calling 020 3355 4047, or book your free callback.

About The Author

Katherine Kendrick

An experienced Payroll professional, I hold a CIPP Diploma in Payroll Management and have been working in the sector since 2003. In my spare time I like to be with my friends and family, or doing a spot of pilates.