Annual Raises: Strategy or Requirement
We get asked this question a lot, and our answer is Both.
Annual raises are a hot topic because they play a significant role in employee value perception and make a big impact on the company budget. Planning for annual increases can be especially stressful for smaller companies, but there are plenty of creative ways to show your employees you value their work that does not require cash outlay.
Like most topics we cover at Valor Payroll Solutions, there’s a compliance component to assessing when to give raises. Though no law requires scheduled increases, federal and state mandates on minimum wages could require you to raise salaries.
We discuss the legal considerations as well as strategic methods for showing your employees that you want them on your team long-term without inflating costs.
Understanding Legal Requirements
Regarding salary compliance, the key is to monitor changes to federal and state wage laws. The Federal Fair Labor Standards Act (FLSA) mandates the minimum wage and regulates overtime pay, but it does not require you to provide scheduled raises to your employees.
State wage laws focus on minimum compensation requirements and, like the Federal law, do not require periodic wage increases. However, Federal and State minimums change regularly, so your main obligation is to stay informed of increases and effective dates to ensure your rates meet the minimums.
When Raises are Required
In most cases, you are not required to give your employees a raise. However, there are several situations where you may be obligated to issue wage increases. Beyond wage minimums, other cases where raises could be required include:
- Union Agreements: Employers bound by collective bargaining agreements must comply with the terms, which may include scheduled pay raises.
- Government Regulations: In sectors such as federal contracting, wage adjustments may be required to comply with government guidelines or contracts.
- Local Ordinances: Some cities may have ordinances that periodically raise the local minimum wage, which could necessitate pay adjustments.
It’s especially important to review contracts and agreements when there are major changes to your labor force. For example, a merger or acquisition usually brings new and sometimes complicated employment agreements that could include wage increases.
At Valor Payroll Solutions, we operate inside client contracts, stay informed on mandates within our service states, and provide our clients with regular updates to ensure their wages are compliant. Working with a strategic payroll partner will give you peace of mind that you are doing right for your employees while also adhering to your legal obligations.
Best Practices and Business Considerations
While they may not be legally mandated, not offering raises can erode employee morale. Below we discuss some key factors to consider when deciding on wage increases:
- Industry Standards: Research average wage trends within your industry. Competitive pay helps attract and retain top talent, reducing the risk of turnover.
- Market Competitiveness – Stay ahead of inflation: Failing to give periodic raises year after year will eventually add up to huge variations from market rates and negatively impact your competitiveness in the job market.
- Employee Morale and Retention: Offering raises, even modest ones, can boost morale and encourage long-term commitment.
- Company Culture: Regular raises, or alternatives, can reinforce a culture of recognition and appreciation, signaling to employees that their contributions are valued.
Alternatives to Raises
For small and medium-sized businesses or start-ups, financial limitations can make it tough to commit to annual raises. However, you can offer alternatives for employees that communicate how much you value their contributions. We listed several impactful alternatives below.
Performance-Based Raises
Rather than offering across-the-board raises, companies can reward high performers with merit-based increases, keeping costs manageable while motivating top talent.
Variable Pay Models
Introducing bonus structures or profit-sharing options that are not directly tied to employees’ regular salary can allow them to share in the company’s success during profitable periods without locking in higher fixed salaries.
Make Enhancements to Employee Benefits
Increasing paid time off, offering flexible work arrangements, or expanding health benefits are valuable ways to reward employees when financial raises aren’t possible.
Professional Development Opportunities
Providing education and career advancement opportunities shows employees that you are invested in their long-term growth, even if immediate raises aren’t on the table. You could even Implement a mentor program where you match experienced employees with team members who wish to grow their skills. These programs empower mentors while fostering growth for mentees.
Focus on Impact and Purpose
Creating a culture where successfully serving the company mission is openly recognized will give employees a sense of purpose. Regularly showcase how their actions positively impact your clients or the community to foster an environment where impact is the focus.
Balancing Requirements with Strategic Incentives
While cost of living or performance-based raises are not required by law, the benefits of offering some variation of an annual award typically outweigh the costs. Regularly evaluating employee performance and compensation, considering industry standards, and adjusting wages as appropriate will help companies retain top talent, boost morale, and remain competitive.
Alternative benefits can keep employees motivated and appreciated when raises aren’t feasible. Above all, you want to set clear expectations and maintain transparent communication regarding how your company structures pay rates, benefits, and rewards.
In the end, you’ll create a culture of recognition and growth—whether through raises, bonuses, or other means—that fosters a productive, loyal, and resilient workforce.
Schedule a meeting today to discuss your wage and payroll compliance or daily management!
