Giving raises to employees has gotten more challenging over the past few years due to the dramatic upheavals in the overall economy. While there are some signs that conditions are improving and a recovery is underway, bumping up the salary of workers is still a complicated issue for some businesses. The easiest option is to simply postpone them, but is that the wisest action to take for the long-term health of your business? Here are three perspectives on how to think about the importance of employee raises.
Improves employee morale
Contrary to what you might think, raises are much more than simple financial transactions. Awarding pay increases can reverberate through an organization, pumping up spirits, and boosting productivity. "The first thing I tell business owners is that you need to keep morale up," says Rebecca "Kiki" Weingarten, a career and executive coach and co-founder of Atypical Coaching. "A raise will show that the employee is appreciated and that what they bring to the company is valuable."
This feeling is usually more acute in small businesses rather than large corporations, Weingarten notes, because owners are likely to interact with their employees more closely. "When you need a little extra effort, employees are going to be there for you because they feel that you've been there for them," Weingarten says. "These are the people who won't take off when they have a sniffle. It's amazing what a little good feeling will do."
Information and transparency about company policies are key to alleviating problems preemptively, Weingarten adds. A clear statement about how raises are determined can remove a lot of the questions employees secretly have and reduce their anxiety. Small business owners can give themselves wiggle room and relieve some of their own pressure, too. For example, the policy can state that yearly raises may be suspended due to a severe economic downturn or some other unforeseen calamity. The important thing is that employees know in advance what to expect.
"Think of it like a partnership," Weingarten says. "You have answered the question for them preemptively." Instead of stressing over their salary, employees will more likely channel that nervous energy into focusing on their work.
Encourages flexibility among workers
Clearly stated company policies on raises might work for some businesses, but not for all. Some small businesses have found success with a less formal, but surprisingly effective and personal way of handling pay increases. Case in point: Dinovite, a Kentucky-based manufacturer of all-natural pet products, founded in 2001 by Cindy Lukacevic and her husband, Ed.
Dinovite has 17 full-time employees, and the business is currently testing using temporary workers during peak periods. Full-timers are cross-trained to be able to handle different parts of the business—for example, a member of the marketing team may be pulled to work on the production line—and are expected to be flexible team players.
"We hire rock stars who desire the best for Dinovite and come up with great ideas," Cindy says. "These are great people who take processes and make them better. We're asking for your brain and for you to give input. We look for people who are innovative and creative and enthusiastic. Those are the types of things we give raises for."
For example, when a key team member had to be replaced, Lukacevic knew who she wanted to move into that position—but she didn't want the employee giving up her existing responsibilities because she was doing such a good job. "So she kind of took on two hats and created this unique, eclectic type position. In return, she did get a raise," Cindy says. "She filled this huge hole, and it worked out really well for us."
Lukacevic and her husband set the pace at Dinovite, and they will quickly pitch in wherever and whenever the work needs to be done. Such flexibility makes them familiar with what's going on in the lives of their employees, and gives them the chance to intervene early in difficult situations. In one instance, an employee at the company was forced to take a second job because her family was splitting up. Lukacevic didn't want to see her work two jobs, so she gave her more money. "She's absolutely worth it. It filled a need in her life, and we were able to do it," Lukacevic admits.
For 2013, Dinovite is looking at implementing some kind of incentive program for employees. "When we're highly profitable, so is everybody," Lukacevic says.
Shows your appreciation in different ways
Like Dinovite, Paloma Clothing—a womens' clothing, jewelry, and accessories store in Portland, Oregon—doesn't have a formally stated policy on raises. But that doesn't drive employees away. In fact, it's just the opposite: employee retention has been at an all-time high for the past five years.
"We try to give employees what we call a three-percent cost-of-living raise every year when their annual review is up," says Mike Roach, co-owner of Paloma Clothing along with his wife. "We'll do bigger raises selectively where some employee has stepped up to greater responsibilities or given particularly outstanding performance. In the last six years, we've been largely preemptive by simply doing an annual review. Everybody knows when their review month is."
Roach emphasizes that it's important to give employees something to show your appreciation, even when times are rough. He was forced to put raises on hold during the worst of the recession in 2008–2009. In lieu of a cash bonus, he has given employees the equivalent of a gift certificate for store clothing and added extra vacation days to their allotment.
"Instead of thinking of yourself as the owner of the business, think of yourself as the coach of your employees," Roach suggests. "Recognize anything good that your employees do. That'll help them do more of it because they know you notice it."