First published: March 29th 2023
Last updated: March 29th 2023

The cost-of-living crisis has put severe pressure on business owners from a variety of sources.

In addition to the increasing cost of energy, loans and raw materials, employees are also seeking higher salaries to help manage their own bills.

We find that certain business owners don’t know how to handle pay rise requests so in this post we take a look at some key steps in managing this sensitive topic.

Link pay rises to performance

The best thing to do when you first receive a pay rise request is to ask for some time to consider it. Not all employees make the same contribution and it’s perfectly reasonable to say you will need some time to review the position.

If the employee makes a verbal request, you could ask them to make a written submission setting out the reasons they think they deserve a pay rise.

Once you have received the request in the format you require, advise the employee that you will review their performance with a line manager and if appropriate, colleagues and clients. At this stage, it’s a good idea to give the employee a timeframe about when they can expect to receive your decision.

Your appraisal will examine factors like productivity, quality of work, customer satisfaction, teamwork, and adherence to company values.

Once you have made a decision on the employee’s performance, you can move to the next step.

Carry out a salary review

Once you’re satisfied that the employee’s performance is at the standard you require, you should examine what the market pay rate is for an employee working in that position. Recruitment companies generally publish salary guides which can be helpful in this regard.

As part of this exercise, you should also consider your budget, projected revenue growth, and profitability.

You may wish to share some of this information with the employee if your projections impact on your ability to accept their pay rise request.

Be prepared to negotiate

You may need to enter negotiations with the employee on the pay rise amount. Your negotiating position will be influenced by the factors mentioned above like the employee’s performance and the market rate salary for employees in their role.

Once you have considered the position, you may want to consider making a counter-offer on salary or a compromise. Depending on what the employee’s preference is, this could be a performance-based bonus or a flexible working arrangement.

Consider alternatives to a pay rise if necessary

There are alternative benefits that can help you hold onto a valuable employee even if your budget doesn’t allow you to grant a pay rise.

Depending on what the employee’s priorities are, flexible hours, remote working or more generous annual leave could all satisfy the employee even if their pay rise has been declined.

Decide who is communicating the decision

Salary negotiations are a delicate topic and it’s important that the employee receives honest feedback. If you decline the pay rise request, you risk losing the employee’s services so it’s important that your decision is backed up with your rationale for making that judgment.

You also need to think about who is communicating the decision. In bigger businesses, the HR department might handle the process but in a smaller SME, you will often have to communicate the decision yourself or ask the employee’s line manager to do so.

If the employee receives a clear explanation from a direct line manager as to why the pay rise was either accepted, declined or part-accepted, this will help to sustain the employment relationship.

If you have to decline a pay rise request from a valued employee because you simply do not have the budget to accept it, schedule a date to review the situation with the employee. This approach could prevent the employee from applying for a new job until your finances improve and you are in a position to grant the pay rise.

Whatever decision you make, ensure that the employee receives a thorough explanation outlining your reasons for granting or declining the request.

This will demonstrate that you take pay rise requests seriously and ensures that employees don’t think that they will receive a pay rise if they simply ask for one.

Maintaining a positive working relationship

It is essential to note that not all pay rise requests may be granted, as you need to balance the employee's expectations with your company's financial constraints and market competitiveness.

However, a transparent and fair process will help employees understand the reasoning behind the decision and maintain a positive working relationship.

Ask our HR experts about managing pay rise requests

If your business is struggling to cope with inflationary pressures and you want assistance with managing pay rise requests, call 1800 719 216 today to speak with an expert.