How to Calculate a Raise: Practical Guide for Employers

By 2030, the US alone will lose $430 billion annually due to low talent retention — and a lot of this turnover stems from low pay. That’s why learning how to calculate a raise and retain your top performers is important. 

Whether you’re miscalculating inflation adjustments, failing to reward top performers, or not providing the right opportunities for advancement, don’t be surprised if your employees start browsing for new jobs. 

Calculating raises right is crucial — especially to make your employees feel valued. This blog post will give you all the information you need to calculate employee raises. Let’s dig in!

Introduction to Salary Increases

The Hays Salary Guide FY24/25 survey shows that ~86% of employers wanted to increase salary for their employees this year. This is down from 95% last year but still very promising.

Ideally, the annual salary increase would be based on a budget that sufficiently reflects each employee’s value, success, pay classification, and contribution. However, that’s only sometimes the case. Financial constraints often complicates allocating a budget for increasing an employee’s salary.

But how do employers decide who gets a salary increase? And how much?

Various factors help employers decide who will receive a pay raise, and the value of each increase requires fair evaluation. Let’s examine the importance of fair compensation.

Importance of Fair Compensation

Proper compensation and benefits packages are crucial for your employees, but that’s just the bare minimum. Reasonable increments are arguably even more critical for helping your employees feel valued. Let’s take a closer look. 

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Raising/Maintaining Employee Morale 

Giving employees a poor compensation or benefits package makes them feel unmotivated, unappreciated, and dissatisfied. With these feelings increasing daily, employees are highly likely to seek other jobs for fair compensation. That’s why offering your employees fair and reasonable compensation ensures they feel motivated enough to produce their best work.

Tip: If your business can’t afford to increase salaries, consider offering non-monetary benefits or variable pay to ensure your employees feel valued.

Improved Productivity and Loyalty

Fair compensation also pushes employees to work harder and achieve more, significantly increasing productivity.

A recent HubSpot report showed that decreased or lost employee productivity costs US businesses $1.8 trillion annually.

Reasonable benefits and compensation enable employees to push their boundaries and ensure success at work. Fair compensation encourages and motivates employees to be more productive and efficient while feeling valued and appreciated. 

This way, employees will likely stay loyal to the company and be more engaged.

Tip: Consider awarding employees with sales-based commissions, performance-related bonuses, and team rewards. Also, consider offering benefits like product discounts, child care, flexible working options, health and wellness memberships, etc.

Read more: Boost Productivity with the Swiss Cheese Method

Recruitment and Retention

According to analyst Josh Bersin, replacing an employee costs up to twice their annual pay. That’s big! In addition, compensation is a significant contributor to new hires.

However, with low compensation and benefits options, you’ll likely struggle to find top talent for any job role. One solution is to hire third-party companies or leverage embedded systems solutions to hire top talent for your company.

Another point to consider: High employee turnover can decrease morale and productivity. Compensation and benefits packages can also help retain existing employees, reduce recruitment costs, and prevent significant absences from the company.

Tip: Create a mix of direct and indirect compensation options to gain a competitive edge and meet your company’s goals.

Now that we understand the importance of fair compensation let’s examine in detail the factors that influence raise decisions. 

Factors Influencing Annual Salary Raise Decisions

We all know top-performing employees deserve performance raises. With inflation and cost-of-living adjustments constantly fluctuating, annual salary raises for all employees seem like a no-brainer—but it’s not that simple. 

Calculating an employee’s raise involves several components. Let’s examine the most notable factors. 

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• Performance. Employee performance is a vital factor in determining their raise percentage. The better an employee performs, the more likely they are to positively impact profits. Managers should take this into consideration and reward high-performing employees to aid retention efforts and increase morale.
  

Read more: Measuring Employee Performance: Understanding Key Metrics for Business Owners

• Inflation rates. Inflation rates play a vital role in determining an employee’s raise percentage. Inflation directly affects employees’ standard of living and basic necessities. So, the higher the inflation rates, the greater the chances of employees expecting a hefty raise.
  
• Industry standards. Employers should always be researching what other companies in their industry are paying their employees. Businesses that fail to offer a competitive salary and benefits package open the door for employees to work for their competitors.
  
• Company’s financial situation. Company performance or financial situation are crucial factors that affect an employee’s raise percentage. If your company logs higher profits for a financial year, the budget HR can allocate for teams is bound to increase. In contrast, with losses like covering technical debt and other budget constraints, companies are forced to offer low, sub-par raises. In recessions and other economic downturns, raises may be waived altogether. 

Basic Formula for Calculating Raises

Calculating a raise is very simple. The formula is:

NS = CS x (1 + HP/100), where

NS = New Salary, CS = Current Salary, RP = Raise Percentage

Let’s take an example. 

An employee currently earns $100,000 and gets a 5% raise.

So, the new salary will be:  $100,000 x (1 + 5/100) = $100,000 x (1 + 0.05) =  $100,000 x 1.05

NS = $105,000

The new salary is $105,000.

Understanding the Salary Increase percentage method

Sometimes, the compensation increase letters only contain the pay raise percentage and not the new salary. In these cases, knowing how to calculate your raise percentage accurately is crucial.

Below is the formula to calculate the raise percentage.

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Let us understand this with an example.

Say your new salary is ₹50,000 and your old salary is  ₹25,000.

• Step 1: Salary difference: ₹25000
• Step 2: Dividing the variables, that is: 25000/50000 is 0.50
• Step 3: Multiplying 0.50 times 100 gives you 50. 

Hence, the salary increase is 50%.

Examples of Common Raise Percentages

As discussed earlier in this article, a reasonable raise percentage increase depends on various details. However, an employee’s perception also plays a vital role.

On average, companies offer employees a 3-5% raise. The percentage raise might seem low, but it’s crucial to remember that consistent wages increase and can accumulate with time and provide a higher income than what you received when you started at the company.

Note: Although companies offer a raise, they may also provide a non-cash benefit or perk, such as a career development program, which is a testament to your value as an employee and can help maximize your earning potential in the future.

How to Calculate Hourly Wage Increases

Calculating hourly salary is very simple. Here is an illustration of how you can calculate hourly salary.

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Note: Gross income is the employee’s total pay before taxes or other deductions. In this case, income refers to all income — not limited to employment — property, services received, or income received in cash.

How to Calculate a 2% Raise Hourly

As mentioned, employees or employers can use the formula to calculate an increase in salary. So, to calculate a 2% raise for an hourly wage, follow the steps below:

1. Determine the current hourly wage.
2. Specify the raise percentage: Here, it’s 2%.
3. Convert the percentage to a decimal: Divide the percentage by 100 to convert it to a decimal. For a 2% raise, the decimal is 0.02.
4. Multiply the current hourly wage by this decimal to find the raise amount. 
5. Finally, add the raise amount to the current hourly wage to get the new hourly wage. 

Imagine your hourly rate is $10 an hour. 

If you get a 2% raise, it would amount to $10 × 0.02 = $0.20. So, your new hourly salary is your current salary + raise amount, which is $10 + $0.20 = $10.20.

How to Calculate a 3% and 5% Raise Hourly

To calculate a 3% and 5% hourly raise, follow the same steps mentioned in the above section.

Let’s look at the above example from the 3% and 5% perspectives.

For a 3% raise:

Imagine your current salary is $10. 

As your raise percentage increase is 3%, it would amount to $10 × 0.03 = $0.30. So, your new hourly salary is your current salary + raise amount, which is $10 + $0.30 = $10.30.

For a 5% raise:

Imagine your current salary is $10. 

As your raise percentage increase is 5%, it would amount to $10 × 0.05 = $0.50. So, your new hourly salary is current salary + raise amount, which is $10 + $0.50 = $10.50.

Using a Salary Increase Calculator

A salary increase calculator is custom-designed to cater to calculating the salary after a worker gets a raise. All you have to do is enter your current salary and raise percentage, and the pay raise calculator will immediately give you your new salary.

Here are a few advantages of a pay raise calculator:

• Easy to use. Most salary raise calculators are user-friendly and require specific, essential inputs, making them accessible and easy to use.
  
• Accuracy. Automated salary increase calculators significantly reduce human errors and their associated risks.
  
• Speed. The calculator offers instant results that can save your team time spent on manual calculations.
  
• Details. Various calculators in the market have the feature to offer a detailed breakdown of your raise that includes the new total salary and increased amount.
  

Accounting for Taxes in Pay Raises

Taxes are crucial to consider when calculating your salary so that you can understand the amount that’ll hit your pocket after all taxes and deductions are complete. An increase in your salary increases your gross pay, which, in turn, affects your net income.

Before discussing accounting for taxes in salary raises, we need to understand the difference between gross and net pay.

Salary Type	Definition	Salary increase considerations
Gross Salary	The total amount of money an employee earns before deductions like taxes, health insurance premiums, retirement contributions, and other withholdings.  The income includes: SalaryOvertimeBonusesOther earnings	An increase in gross salary means a higher total compensation, but the benefit depends on how much is deducted in taxes and other withholdings.
Net Salary	Net salary is the total pay that hits your pocket, the amount after all deductions are made from the gross salary.	This is what matters for your disposable income. A gross raise might seem substantial, but high taxes can reduce the net increase.

Pay Raise Calculator with Taxes

Let’s take an example here.

Imagine your current gross salary is $20,000.

You receive a 10% raise. So:

• Your New Gross Salary: $20,000 + ($20,000 x 0.10) = $22,000

Let’s assume a total tax liability of 25%:

• Your Current Net Salary: $20,000 – ($20,000 x 0.25) = $15,000

• Your New Net Salary: $22,000 – ($22,000 x 0.25) = $16,500

Net Increase: $16,500 – $15,000 = $1,500

Notice how even though your gross salary increased by $2,000, the net increase due to taxes and deductions is only $1,500. 

Long-term Salary Projections

Your entire life planning depends on your long-term salary projection. The projection enables employees to plan a financially secure tomorrow by understanding how their salary will evolve by taking promotions, salary raises, and inflation considerations into account. 

Let’s take an example: How would you project your salary for the next ten years?

You can calculate your salary increase over ten years with the raise formula mentioned above in this article. The only difference is that you consider an employee’s current annual salary increase in decimals, add 1 to it, and multiply it by your initial salary. The formula becomes:

FS = IS x (1 + AI/100)¹⁰, where

FS = Future Salary, IS = Initial Salary, AI = Annual Increment

Say your current salary is $50,000, and you expect an annual percentage raise of 5%.

Using the formula: 

FS = $50,000 x (1 + 5/100)¹⁰ = $50,000 x (1.05)¹⁰ = ~$81,445.

So, after ten years, your projected salary would be ~$81,445.

Best Practices for Announcing Pay Raises

Announcing salary raises is one of the most crucial and unnerving tasks managers have to do. If not done right, it significantly impacts employee motivation, retention, engagement, and morale. 

If you’re nervous about announcing pay raises, there are three crucial components to remember:

• Transparency
• Effective communication
• Equity 

With these components in mind, here are some more specific best practices to consider:

1. Before the announcement, have all relevant information ready. 
2. Always announce raises to your employees one-on-one.
3. Don’t leave scope for misinterpretation. State the new salary, effective data, and other relevant information clearly.
4. Justify the raise with employee achievements, contributions, and performance.
5. Discuss future goals and growth in the company.
6. Keep these interactions confidential. 

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Communicating Effectively with Employees

Communicating openly and honestly is crucial in getting your word across without any confusion. A few ways to effectively communicate with employees include:

1. Open Dialogue. In your employee evaluations, encourage open communication and invite employees to ask questions or express concerns. This fosters trust and clarity.
   
2. Active Listening. Active listening is one of the most important soft skills a manager can have — and there’s no better place to put it to the test than an employee review. Pay attention to the employee’s feedback and respond thoughtfully.
   
3. Consistent Messaging. Ensure consistency in how raises are communicated across the organization to avoid misunderstandings and ensure fairness. Make sure to keep these announcements confidential even if the news is good. 

Maintaining Transparency and Equity

Transparency is another crucial factor in announcing raises. Here are a few best practices. 

1. Clear Criteria. Establish clear criteria for raises that are communicated to all employees.
   
2. Regular Reviews. Conduct regular performance and salary reviews, aligning employee performance with raises.
   
3. Equitable Practices. Ensure that the process for determining raises is fair and unbiased, including monitoring forces based on gender, race, or other aspects.
   
4. Documentation. Keep thorough records of performance evaluations and the rationale behind raise decisions.

Conclusion

Calculating a raise is a critical process for employers that involves balancing the need to reward employees fairly with maintaining the company’s financial health. 

Employers can ensure that raises are equitable and motivational by following a structured approach that considers factors like employee performance, market rates, cost-of-living adjustments, and company budget. 

Transparent communication about the criteria and process for raises further reinforces employee trust and satisfaction. Ultimately, a well-managed raise process recognizes and retains valuable talent and fosters a positive and productive workplace culture.