Remember the days when you kept your head down, worked hard, and hoped for the financial best? With “best” being defined as a meager 2 to 4% annual raise, which wasn’t even guaranteed, and if you were lucky enough to receive a raise, the majority of it would be swallowed by taxes. If your employer didn’t come to the table with the dollars, you either spent your days complaining or looking for another job.
Today, employees are getting bolder with their requests, because competition for competent talent is fierce and the outrageous level of perks has escalated compensation expectations. The proof is in the data, as reported by The Bureau of Labor Statistics, which shows a general upward trend of increased salary and compensation costs for employees across industry sectors. Whether you’re a barista or a banker, you’re probably seeing a few more dollars in your paycheck. All of this sounds great for employees, but what about for small business owners?
For any small business owner, staff retention and turnover are real challenges. A study by BambooHR revealed that 31% of respondents have quit a job within six months.
To throw salt into an open wound, when employees quit, you’re left with the turnover costs. This includes the costs for recruiting, hiring, training, and onboarding new talent. And that’s not even accounting for the effect on your other employees, who have to pick up the work slack for employees who’ve hit the road.
While money isn’t everything, it’s a large part of why employees leave their jobs. You may be able to keep an employee if you have a stellar company culture, but sooner or later they’ll be clamoring for cash, and you have to be a step ahead of the request.
How can you compete with free organic snacks and foosball tables? How can you make sure that the staff you’ve recruited and trained doesn’t jump ship if you’ve failed to meet their salary requirements? Finally, what do you do when employees request more money but they aren’t making the grade?
We’ll show you how to manage an employee asking for too much money or promotion request in five easy steps:
Step 1: Say the three magic words
Those three magic words are: Tell me more. Get more information as to why the employee is asking for a raise. It might be that their perception of their performance isn’t in alignment with yours, and that will require mentoring and clarity on your part.
According to the same BambooHR study, the top three reasons for employee turnover are: lack of clarity on job roles and expectations, a difficult boss, and a less-than-stellar onboarding process. Employees want clarity, and it’s important that you’re both on the same page when it comes to their role and performance. Once you’ve heard their reasons, document the salary request and tell your employee that you’ll consider it. This shows them that you’ll give their request the attention and respect it deserves — even if you’re certain you’ll deny it.
Step 2: Evaluate the ask
Just because your employee has been working in overdrive on a special product or to meet an important deadline doesn’t entitle them to a salary bump. When assessing whether a member of your team is due for a raise, don’t confuse a heroic sprint with consistently high performance over time.
In such cases, determine whether a one-time spot bonus for hard work is a better solution than a salary increase. It’s when you’ll be investing in an employee who can bring in additional revenue or reduce costs that an increase in salary can make sense.
Step 3: Do your salary research
How does your compensation match up with that of your competitors? It’s important to do some research on salaries for your industry (or for the particular employee role), both regionally and nationally.
Are you underpaying your employee dramatically? Can you make an incremental bump to inch closer to standards while putting them on a step plan for growth? Read Setting Compensation for Newly Hired Employees to learn, step-by-step, how to research salaries across industries and geographies.
Step 4: When you reject, reject with grace
Always be tactful, respectful, and show that you’ve done the legwork and research in evaluating an employee’s salary request. Remove emotion from the equation when presenting the facts, and close with their career path, moving forward. You never want to leave an employee dejected without a solution that helps both you and them.
Also, consider nonfinancial perks, if your employee deserves them. Would he or she benefit from a more flexible schedule or other on-the-job benefits? You can make the rejection a conversation about temporary alternatives until you can meet their number.
Step 5: Partner with your employee to create goals
Work with the employee to create a step-plan with SMART goals (goals that are specific, measurable, achievable, relevant, and time-bound) so that the employee has a clear path for promotion; that is, so they’ll know all the things they need to do within a given time frame to get the dollars they feel they deserve. If the employee currently isn’t making the grade, then design SMART goals that will help them get back on track to move forward.
Issue informal check-ins so that your employee sees that you’re invested in their growth. Read our 5 Biggest Mistakes You Can Make When Setting Goals article to make sure you and your team are set up for success.
Recruiting and retaining talent is a challenge for any small business owner — regardless of your leadership savvy. And, when it comes to money, the stakes get higher. Don’t run the risk of losing a great employee, even if they don’t warrant a salary increase right now. Why? Your employees are your investment and they can be groomed to be your top revenue generators.
An employee who isn’t eligible for a salary increase today might be making the grade in the long run. Take the time to evaluate and discuss their request and see if there are ways in which you can buffer the financial issue with non-monetary perks and benefits. Always create clear expectations and goals, because your employee’s success contributes to your success as a small business owner.
A talent platform software is a specialized software that helps companies manage their hiring process by connecting them with talented individuals who are looking for job opportunities. These platforms use algorithms and data analysis to match job seekers with potential employers based on their skills, experience, and preferences. They also provide tools for recruiters to manage and track job postings, applicant resumes, and interviews.
Thank you for sharing, David!
An excellent article with lots of great suggestions.
That’s great feedback, Ginny. Thank you for sharing it!
Great Article, I am a owner of a Commercial Plumbing Company and I have an employee that has been with me for 10 years. He started at $10.00 an hour with no experience, today he is at $23.00 plus all the benefits (401k, health care, vacation etc.) and is a great employee. Now I hired a new employee with no plumbing experience but has potential to learn the trade and has mechanical ability, but wants $25.00 and we settled at $20.00 with a 6 month evaluation. I gave him a $1.00 more at 6 months. Any recommendations on how to keep this fair between employees coming in today opposed to the ones that have been with me for a while?
-You can’t bring in a new, less-experienced person and pay them the same as those who are already there. You have to have a formal pay structure with compensation tied to merit, performance, tenure, etc.
-I get that you like the new person and he’s valuable. But because of inflation and the tight labor market you may have to bite the bullet in 2023 and re-address all compensation levels.
-Consider offering some perks to those employees that earn them after being with your company over time. These can include:
-more flex time
-participation in a bonus plan
We’re so glad you liked it, Jonathon! Thank you for the comment!
This is very helpful as a small business owner. I have just been faced by this as an employee just asked for a raise.
We’re happy to hear it was helpful content for you. Thank you for commenting on SBA!
Thanks for the great article. I would love to see an expanded topic here on how to handle employees comparing salaries and then employees coming to me wanting raises based on “John is getting paid x and I’m doing way more than he does.” Or new hires with the attitude of “I can make $18 at McDonald’s right now” not realizing McDonald’s is giving two 4 hour shifts per pay period, so its really a non-argument, but some employees don’t always see the bigger picture. It’s a very frustrating time right now to be an employer. Any advice, experience, input, etc. from others would be interesting.
We’re glad you liked the article! We can look into creating another article around that topic.
Thanks for reading SBA!
I had an employee that was underperforming and I know I was negligent in giving him reviews. He received a large offer from another firm which he asked me to counter. I told him it was a large raise that I could not afford at that time, but help me get certain projects out in a timely manner (I listed the projects), and I would give him a bonus equal to the raise he was requesting. He declined because he wanted it as salary, not as a bonus, and moved to the other firm. The sad part is when an employee is underperforming and moves to a significantly higher paid position, there are expectations that they will not meet. He was released from that firm in less than 2 years when they decided to “reorganize.” I sometimes regret that I did help him see that he was underperforming, but I am not sure he would have believed me.
Thanks for sharing your personal experience, Joyce!
I’m a big proponent of step 5. But put a hard schedule on it. Go so far as to set up a 1 to 3 month appointment and put it on the calendar to review the goals you set. Put the goals in writing. At the appointed time task the employee with doing their own review of each goal and submit it in writing just prior to the meeting. Be flexible – maybe, over time one or more goals weren’t truly achievable, but that should become obvious. When hiring, hire for the three A’s. Attitude, Aptitude and Ability. Attitude is paramount followed closely by Aptitude. Those two alone can (and usually do) make a great employee. The third A (Ability) just sets the price. If you can afford high ability go for it, if not, those first two A’s will get you there.
Great advice, Dan! Thanks for sharing.
I hired a new worker in December and had to pay prevailing wages. While she spoke no English she figured out how to tell her coworkers how much she made by writing it down for them. Her wages were about the same as others who had been with me for 5 years. And she made many mistakes.
I came in on the Monday following her news release to my entire staff standing in my office demanding raises. Woof. I have about 10 and the whole thing cost me about $30K / year in added wages. Double Woof.
In the end, my workers were right. When I had to hire newbies at the higher wages, I should have put in a temporary or permanent wage adjustment. Due to all the news, everyone thinks the minimum wage is already $15/hr. As a small business, I just missed the signs. Tooo busy.
Employees are not barred from sharing their salaries with one another, they are however made to believe that they shouldn’t do that, and who benefits from this? The employer. If I were working for your company for five years without a raise or my salary barely keeping up with inflation and I’d learned the new hire was making double or triple my salary, I too would be asking for a matching salary. Often, many employees do not ask for raises when English is not their primary language for fear of being fired. Her making many mistakes as you say makes me wonder if she was properly trained by a person who spoke her native language and could convey exactly what was expected of her. If this was not the case, then her mistakes fall under you as her employer. Granted, as the employer you can always deny an employee’s raise request, but you’re also gambling on losing experienced workers who know how to provide ‘x’ service for your company vs having to train someone new to save a few bucks.
Good read. Last year, an under performing employee requested a pay raise and reminded me they hadn’t had a pay raise in over two years. Since I had been negligent in providing performance reviews, I realized the staff member was in the dark as to why there hadn’t been a pay raise in years. In a meeting, after reviewing their performance, it became clear what changes they needed to make to warrant a pay raise. This year an 8% pay raise was approved.
Thank you for sharing your first hand experience, Chris. We appreciate the comment!
Great info. Thank you for doing this.
It’s our pleasure! Thank you for the comment!
Another good strategy to keep in mind. I used a pre-emptive approach before they asked for a raise of setting up a new bonus structure while keeping salaries at the same level. They felt I was looking out for them during this time of uncertainty and big jump in inflation. They make more money when I make more money, Its a win-win!
You fail to address the not-rare situation where a person is good in the role they are filling, but want to be paid commensurate with employees in different jobs. Not everyone is suited for every position, even with training, and not all positions are of the same value and pay the same. Sometimes someone has maxed out at your company, and can only expect cost of living increases.
I had this happen recently in February 2022. My response was to close the location permanently and gave them two weeks notice with no raise in pay. They were paid more than what they worked and were worth, not to mention had the most flexible work schedules for hourly employees with unlimited time off. The pandemic has disillusioned many into believing they are worth more than they actually are, and for a small businesses that’s an extremely expensive illusion. It was best for me to close than to go further into debt trying to “keep up” with their demands. It was a decision, I don’t regret and I’m much better off for having done so.
Much respect to all business owners, big and small.
The section on how to handle a employee’s raise request.