8 Key Factors in Determining Salary Increases

8 key factors in determining salary increases
Consider each employee’s individual performance

A good place to start when evaluating and determining pay rises is to examine each
employee’s individual performance. Have their successes added value and made a
difference to your organization?
To assist in your evaluation, refer to an employee’s most recent performance review.

You can use this data to identify if an employee has exceeded performance goals
and targets in the past year. Consider both the quality and quantity of work
completed and measure performance against set goals for clear and transparent
evaluation.
An employee, for example, might have mentored another employee, introduced new
systems to the organization or put their hand up for additional responsibilities. Or
perhaps they delivered an important project ahead of deadline or above and beyond
your expectations.
Also consider their attitude to work and performance. Do they have a positive impact
on other employees? Have they introduced new corporate knowledge into the
organization that colleagues have benefited from? Do they collaborate effectively
with others? Do they show initiative?
Consider too the employees’ development over the past year. Have they shown a
willingness to learn new skills or take on additional responsibilities? Have they
improved in any areas since their last review? Such factors can indicate an
employee’s potential to grow with the organization and contribute to its long-term
success.
Weigh up your employees’ responsibilities

An employee’s job responsibilities vary depending on their role, but are usually
defined in their job description. Revisit each employee’s job description to clarify their
responsibilities and the complexity and scope of their role.
Then take an inventory of any additional responsibilities your employees have that
aren’t captured in these documents. You may find that certain employees have
assumed more responsibility over the past year than their job description suggests.
Scope creep, after all, is common in jobs. So, if an employee has assumed greater
responsibility, you should factor this into your pay rise decision. You should also
formally revise their job description – if their responsibilities justify a formal
promotion, make it happen.
While promotions typically come with a pay rise, if your organisation isn’t in a
financial position to offer a salary increase in line with their wider responsibilities,
assure your employee that you will prioritise a greater salary increase as soon as
you can.
Understand typical market rates for each employee’s role
Competitor’s typical salaries should also factor into your pay rise decisions.
Employees want to know they are being paid a fair rate for their skills and expertise,
so make sure your salaries align with those offered across your sector or industry.
Our annual Hays Salary Guide FY24/25 is based on a survey of more than 15,000
organisations and skilled professionals. You can download a copy to access typical
salaries and insights relevant to your industry to ensure you are offering competitive
salaries. If your salaries are below the external typical value, it can impact employee
engagement and turnover.
By knowing that the salaries your employees are receiving are competitive with the
external market, you can make a strong argument in support of the salaries you set.
Not every employer will set salaries that match the averages, of course. The size of
your organisation and the region you operate in can play a part. That’s why our
salary guide also includes, for each role, a minimum and maximum salary, along with
salaries in multiple locations.
By knowing these salary standards, you can make more confident decisions about
the value of each salary increase.
Evaluate your employees’ skills

The expertise and skills an employee holds can also factor into your decision –
particularly if certain skills are universal requirements across your workforce. An
employee who possesses specialised skills or experience may command a higher
salary than the average for their role.
To set salary increases that reflect your employees’ skills, first set clear definitions of
the job skills you intend to compensate employees for.
Some skills are easier to define in quantifiable terms than others. However, for a soft
skill like teamwork, for example, define clear criteria you can measure against.
Consider the seniority of an employee’s role

Employees’ salaries often increase with seniority for various reasons. Senior
employees typically offer a high level of specialty knowledge, commercial acumen,
experience and leadership capability.
However, none of these attributes are inherent characteristics of seniority. So, when
reviewing the salary of a senior employee, evaluate whether their seniority is
indicative of breadth of experience, commercial acumen, specialist knowledge,
leadership credentials, strong relationships and networks, industry insight and other
essential qualities.
Likewise, some mid-level staff may be especially deserving of salary increases.
Don’t underestimate their capabilities in areas senior staff are normally recognised
for.
Remember, seniority can inform the hierarchy of salaries, but it shouldn’t

automatically mean salary increase entitlement, particularly if an employee’s results
and value aren’t amounting to those ordinarily associated with seniority.
Length of service
High turnover is costly, when a staff member leaves, organisations incur various
recruitment costs, including job ads, and time lost doing interviews, onboarding and
training. In addition, new hires often need time to get to the same performance level
as the employees they replace.
Employees who provide organisations with long service can add a lot of value
through loyalty.
So, ensuring your salaries are structured to encourage long service can be a big
financial benefit for your organisation. It’s also an essential part of retaining top
talent.
Skills gaps in your industry or sector

When determining the value of salary increases, consider the difficulty of attracting a
new team member if this employee should resign.
While 20 per cent of employers in Australia feel the skills shortage has lessened,
many roles are still in short supply. If your employee has skills that are hard to
replace easily, take this into consideration when deciding on their salary increase.
According to our Hays Salary Guide a pay rise is the number one benefit employees
are looking for at 71 per cent, and the cost of living is the number one reason they
may look elsewhere at 64 per cent. If an employee with skills in demand leaves
because they perceive their salary is too low, and it takes months to find then train a
replacement to perform at optimal productivity, losing their skills may prove
substantially costlier than retaining them for a higher salary.
When budgets are tight, minimising salary increases is an easy cost saving
measure. However, it’s important to keep in mind that the money you invest into
salary increases can drive savings and profits in other areas of your organisation.
Consider non-financial rewards

Ultimately, your salary increase budget can only stretch so far. Yes, ensuring your
salary offering is competitive is essential, however employees who are happy and
productive aren’t just motivated by money.
Today, a competitive salary is just one element in the overall compensation package.
Also important is the non-financial element, consisting of benefits, flexible work
environments, work-life balance, up skilling, wellbeing support, purpose and strong
relationships between a manager and team.
As benefits expand in our post-pandemic world, these elements can make or break
the success of your compensation. If you feel your employees deserve more than
you can offer financially, consider adding additional benefits to their overall
package to bridge the gap. Engage directly with employees to understand what
would retain them.
More flexibility, work-life balance, career progression, training, mental health and
wellness initiatives and additional annual leave are just some of the non-financial
benefits you can use to reward high performance.
Communicating early is key to success

If the performance of your organisation has not been as expected this past year, flag
this early with your employees. Let them know as soon as you can that the downturn
in business might have implications on salary increases. After all, they have their
own cost of living considerations, so communicate the news as quickly and clearly as
you can.
Don’t wait until a salary discussion to share the implications of poor performance.
Instead, make your rationale as transparent as it can be to help temper expectations
and minimise disappointment.

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8 key factors in determining salary increases

Consider each employee’s individual performance

To assist in your evaluation, refer to an employee’s most recent performance review.

Weigh up your employees’ responsibilities

Evaluate your employees’ skills

Consider the seniority of an employee’s role

Remember, seniority can inform the hierarchy of salaries, but it shouldn’t

Skills gaps in your industry or sector

Consider non-financial rewards

Communicating early is key to success

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