Strategic salary increase planning for business growth
Business Management Team Management

Strategic salary increase planning for business growth

Brenda Barron
Brenda Barron

Service-based businesses often struggle to thrive in competitive markets. As a result, salary increases might be put on the back burner. But that’s not fair to your employees.

Understanding how to strategically plan for salary increases is a must. To help with this, we’ve put together a quick guide for business owners, managers, and HR professionals committed to building a better work environment one decision at a time while effectively managing budget constraints.

Let's take some time now to explore the details of salary reviews and explore a multi-faceted approach to planning salary increases that can move your business forward.

Understanding the importance of salary reviews

Before you can plan for salary increases, you need to conduct regular salary reviews. These are fundamental to ensuring your compensation structures align with market trends and internal equity.

They serve several critical functions, so let’s review them now:

  • Market rate adjustments: Regular reviews help keep your salaries competitive with industry standards, which is essential if you want to attract and retain top talent.
  • Employee performance: Linking salary increases to performance builds a meritocracy within your business and increases motivation.
  • Tenure and loyalty: Rewarding long-serving employees can enhance retention and ensure invaluable company-specific knowledge stays on board.
  • Cost of living adjustments: These adjustments ensure that employees maintain their purchasing power and standard of living despite inflation.

Websites like ZipRecruiter offer a quick way to view the fair market value within a specific state or city and certain occupations. As of May 2024, the fair market value in California is $72,714 or $35/hour, so if you employ people in this state, you could use this info to guide your salary adjustments going forward.

Recent reports indicate that trends for the rate of salary increases vary across different sectors. For 2024, technology and professional services are seeing substantial hikes, reflecting the high demand for skilled professionals in these areas. Specifically, the technology sector anticipates increases between 9.8% to 10% due to the robust demand for tech skills despite global economic uncertainties​, according to TechGig​.

In contrast, sectors recovering from the pandemic, such as tourism and hospitality, may see more modest increases​​. You’ll always need to tailor your salary increase strategies based on both sector-specific trends and broader economic conditions. Again, sites like ZipRecruiter and Payscale are super helpful for focusing on this.

Methods for Calculating Raises

When it comes to actual calculations, companies can adopt several methods depending on their goals and budgets.

Percentage Increases

This method involves increasing an employee’s salary by a certain percentage. Typically, the average annual raise varies from 3% to 5%, depending on the company's budget and the employee's performance.


The formula you use is:

NewSalary = CurrentSalary x (1 + %Increase)

So, if an employee earns $50,000 annually and is to receive a 4% performance-based increase, their new salary would break down as follows:

NewSalary = $50,000 x (1 + 0.04) = $52,000

Flat Rate Increases

This method is suitable for smaller companies or teams where uniformity in compensation is expected. Flat rate increases apply the same cash increase across the board.


Every employee receives an extra $1,500 annually, regardless of their current salary.

Performance-Based Increments

These salary increases are based on the employee’s contributions and achievements over the review period.


You could set specific targets related to client retention, project delivery, or something else. Then, employees who exceed these targets receive a pre-defined increase.

Frequency and size of raises given

Modern compensation trends suggest that the traditional annual review may not suffice in rapidly changing industries. Highly competitive environments also need more regular reviews.

In response, many companies have shifted toward more frequent reviews, potentially bi-annually or even quarterly. This shift allows companies to respond more agilely to market changes, retain talent, and keep compensation competitive​​.

For example, in industries like technology, where skill demands can change on the fly, more frequent reviews can help align pay with current market rates and employee contributions more effectively. This is particularly important as the sector sees substantial pay hikes due to ongoing demand for tech skills​​.

When it comes to how much to raise salaries, there are several factors to consider, some of which we’ve already discussed:

  • Company’s financial health: You must balance rewarding employees and financial stability. Using time-tracking software can help you assess productivity and better plan for the future. But it’s important to note that even with economic uncertainties, businesses plan to offer pay increases averaging around 4.5% in 2024, slightly down from 4.8% in 2023 but still significant​, according to Payscale’s 2024 Compensation Best Practices Report.
  • Employee performance and market position: Performance-based raises are a significant factor. Companies are increasingly using sophisticated analytics to tailor increases based on team performance metrics and market standards​, according to Payscale​.
  • Market trends and economic conditions: With the inflation rates adjusting, companies have a bit more leeway to offer rises above inflation, helping to counteract the real-term decreases in wage values experienced in previous years​​.

Of course, what you opt for will depend on your company's circumstances. But these factors should help you make a decision.

Alternatives to salary increases

When faced with unavoidable budget constraints, alternatives to direct salary increases can maintain employee motivation and satisfaction.

Here are some effective strategies you can rely on when times are tough:

Bonuses and profit-sharing

Bonuses allow you to reward employees based on company or individual performance without increasing payroll costs permanently. For instance, end-of-year bonuses tied to the company's profitability can motivate employees to work towards common financial goals.

Profit sharing is another strategy that directly connects employee rewards with the company's profitability. This boosts motivation and builds a sense of ownership among employees, too. 

Enhanced benefits

Improving the healthcare benefits package is an attractive alternative for many employees. Offering comprehensive health plans, including dental and vision coverage, can also increase the perceived value of working for your company​​. Well-being programs that promote mental and physical health will be appreciated, too.

Work-life balance initiatives, such as flexible working hours, remote work options, and generous parental leave, can significantly enhance job satisfaction and employee retention as well. These benefits are particularly valued in today’s workforce, where work-life balance is often cited as a must for job satisfaction​​.

Lastly, retirement benefits, such as enhanced pension plans or matching 401(k) contributions, can also be a major draw. These benefits help employees feel more secure about their future, which can be just as valuable as a direct pay increase​.

Professional Development

Investing in professional development can be a win-win for both employers and employees. Providing training programs, access to courses, certifications, and opportunities for advancement allows employees to improve their skills and career prospects. This not only enhances their job performance but also their loyalty to the company, as they see a clear investment in their personal growth​.

Offering mentorship programs and career development planning are additional ways to support professional growth. These initiatives help employees visualize a career path within the company and understand the steps they need to take to achieve their career goals​​.

Planning for salary increases can move your business ahead

Well-planned salary increases are an investment in your workforce that can boost morale, improve retention rates, and align your team’s goals with the broader objectives of your company. They require careful consideration of budgetary constraints and strategic goals but can significantly impact employee satisfaction and company success.

Strategically planning for salary increases means building a workplace that values performance, fairness, and competitive compensation. And this can go a long way toward boosting retention.

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