How To Calculate Pay Raise? Learn The Formulas

Pay raises can be a sensitive topic for employers and employees both; however, they are a necessary hurdle to overcome. As important as enjoying your job is, most of us work primarily to put food on the table — so any questions around pay raises are very important to answer correctly.

Calculating pay raises for your employees can sound like a tricky subject, but is actually a fairly simple process when broken down into basic steps. Simply memorize a few calculations, and you’ll be well on your way.

In this article, we will cover the basic pay raise formulas, when raises should be given, and the best practices associated with negotiating pay raises.

Let’s get going!

Breaking down pay raise formulas

You can calculate raise using 2 main types of formulas, both of which are dependent on which type of raise you want to give your employees.

When employers want to give their employee a pay raise, they can do this by either giving them a raise in terms of dollar value, or a raise by percentage of their existing salary. Both methods to calculate raise are explained below in more detail.

The flat raise

If you want to give your employee a raise of $X number of dollars, then this is called giving them a ‘flat’ raise.

You are giving them an excess sum of money in addition to their existing salary. This is the most basic pay raise formula as it involves only one simple calculation.

Let’s take a look at an example to illustrate this better:

Emily makes $40,000 a year.
Her employer would like to give her an additional $5000 as a raise.
New salary = old salary + flat raise amount.
New salary = $40,000 + $5000 = $45,000.

The percentage raise

This formula is applicable when you want to give your employees a raise of X% above their usual salary. This is called giving them a ‘percentage’ raise.

The percentage raise method consists of increasing your employees’ salary by a percentage value. This formula is slightly more complicated than the flat raise formula as you are dealing with percentages. As such, it’s important to take due care when doing these calculations.

Making a mistake could (quite literally) be very costly!

This example should clear things up:

Emily makes $40,000 a year.
Her employer would like to give her a raise of 14%.
New salary = old salary * (1 + % value of raise)
New salary = $40,000 * (1 + 0.14) = $45,600.

When to give your employees a raise

Determining at which point to give your employees a raise can be a challenging problem to solve. Should you wait until they ask for a raise? Or until your company starts doing extremely well?

Here are some of the main factors you should take into account to decide whether or not to give your employees a raise.

Time since their last raise

If it has been a significant amount of time since the employee last got their raise, then it might be time to give them a hike in pay. The general rule of thumb is that an employee should get an annual raise as recognition of their hard work and progress made throughout the year.

However, it is important to take into account that this is not a concrete rule and can obviously differ based on company and position.

Performance

Another key factor is how well the employee has been performing recently. They may have been working overtime, or taking on additional responsibilities since their last raise. If they have gone above and beyond your expectations, it may be time to give them a little extra compensation in recognition of their hard work.

This additional compensation could be worth its weight in gold to the employer as it acts as a signal to the employee. Through the raise, you are telling them that you recognize their hard work, and will reward them for it.

Acknowledging employees’ hard work can encourage and motivate them to work even harder in anticipation of another raise in the future. It is a win-win situation for both employer and employee.

Turnover rates

Take a look at how often employees are leaving your company.

If you’re losing good employees because they’re being poached by other companies offering higher pay, it may be time to calculate raise on salaries across the board to keep your best workers from jumping ship.

However, this can be difficult to keep up with, as other companies may be constantly raising their salaries in order to stay competitive, making it a race to the top.

This is especially true in today’s environment where the hiring market is all online, making it easy for recruiters to reach out to the best candidates and lure them with enticing offers. It’s important to be aware that your best employees are likely to be contacted often by recruiters — so do your best to keep them happy!

The cost of living

If the cost of living in your area has increased, it’s likely that your employees’ salaries should also increase in order to maintain their standard of living. This is especially important if you have employees who are struggling to make ends meet.

Ideally, your employees salaries should increase close to, or above the current inflation rate.

Is your company doing well financially?

Another factor you should take into account is whether or not your company can afford to give raises. If your company is struggling to make ends meet, it’s probably not the best time to be doling out raises.

However, if your company is doing well, you may want to consider to calculate raise to show your appreciation for their hard work. This will motivate employees further to work hard for their company, as they will feel the company’s success translates into their success.

Have your employees been with the company for a long time?

Also consider how long your employees have been with the company. If they’ve only been with the company for a few months, you may not want to give them a raise yet.

However, if they’ve been with the company for a few years, you may want to give them a small raise to show your appreciation for their loyalty.

This sets a tone for other employees and can be beneficial for your company’s turnover rate, as employees will realize that loyalty is rewarded and so may choose to stay for the long run.

5 tips to negotiate pay raises smoothly

Negotiating pay raises can be a grueling process, so we’ve put together 5 of the best tips to negotiate pay raises smoothly:

1. Listen to each other

The first step is always to listen to what the other person has to say. In this case, it’s the employer and the employee. What does the employer want? What does the employee want? If there’s a disconnect, it will be difficult to bridge that gap. Taking the time to listen to each other’s point of view will help immensely.

2. Do your research

Before coming to the table, it’s important that both parties do their research. The employer should know what the market rates are for similar positions and the employee should know their own worth. This will help to set fair expectations on both sides.

3. Know your bottom line

Both the employer and the employee should know their bottom line — what they absolutely need to get out of the negotiation. If one side or the other isn’t willing to budge on their needs, then the negotiation will likely be unsuccessful.

4. Be prepared to compromise

In any negotiation, there needs to be some give and take. If both sides are inflexible, then a resolution will be difficult to reach. Being prepared to compromise on certain points will help the negotiation process along.

5. Keep emotions in check

This tip can be particularly difficult to implement because money is such an emotional topic. However, it’s important to remember that this is a business transaction. Keep the conversation focused on the facts and try not to let emotions get in the way.

The bottom line

Pay raises can be a grueling subject to navigate if not dealt with properly. Potential clashes between employer and employee, and a high employee turnover rate are some of the more harmful consequences of handling the situation badly.

It’s important to keep the communication lines open, focus on the facts and try not to get too emotional about the matter in order to come to the best solution for all parties involved.

Use the formulas above to calculate pay raises correctly, and remember to keep in mind when pay raises should be handed out. After all, the timing of the raises is equally important as the amount given. The 5 tips to a successful negotiation should also help to make the process as seamless as possible.

Best of luck to all those asking for raises, and even more luck to the employers handing them out!