When talking about employees in a company, a raise is one thing that cannot be missed. This happens because salary increases can increase employee work productivity and companies can achieve short-term and long-term targets.
To be able to achieve this, the company must determine how to calculate the best percentage of salary increase. Before that, let’s take a look at the full explanation of the salary increase percentage below.
Salary Increase Percentage
As the name implies, the percentage of salary increase is a percentage that shows how much the increase in salary received by employees in a certain period of time.
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Typically, employers attribute a percentage increase in salary to a number of things including employee performance and overall business earnings.
When performance review time comes, employees who are high performers or those who are considered satisfactory workers are eager to know how much raise they will receive.
In some companies, employees are told what percentage of raise they are getting. However, some supervisors simply tell the employee the total salary they will be earning at that time.
How to Calculate Salary Increase Percentage
When a salary increase is calculated in Rupiah, it may be confusing for some employees. Therefore, many employees and companies have changed the method of calculating the percentage of salary increase to a percentage.
The reason for changing the way salary increase percentages are calculated to percentage form is so that employers and employees alike can easily track percentages and associate them with employee performance ratings.
Here’s how to calculate the salary increase in percent:
1. Calculating the Difference between the New Salary and the Old Salary
For example, PT Jaya increased wages from IDR 4,000,000 to IDR 4,300,000, the wage difference from the reduction in the new wage and the old wage.
Wage difference = new wages – old wages
= Rp4.000.000 – Rp4.300.000
= Rp300.000
2. Dividing the Salary Difference with the Old Salary
The next step is to find the percentage increase in wages by calculating the ratio of the difference between the new wages and the old wages. You do this by dividing to produce a decimal fraction.
Ratio = salary difference: old salary
= Rp300.000 : Rp4.000.000
= 0.075
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3. Multiplying Decimal Numbers
After getting the decimal number from step 2, then multiply the decimal number by the percentage of 100%.
Percentage increase in wages = 0.075 x 100%
= 7.5%
So, the wage increase from PT Jaya from IDR 4,000,000 to IDR 4,300,000 is 7.5 percent.
Types of Ways to Calculate a Good Salary Increase Percentage
1. Market Based Increase
In a market-based increase, some companies may decide to increase the percentage of an employee’s salary according to the position in range. To do so, start with an overall budgeted percentage increase for the organization, and allocate increases to employees based on how far they have progressed through their outreach. This way of calculating the percentage increase in salary will be based on the range for your employees.
This one way of calculating the percentage increase in salary can be done manually, although there are better and more modern options available to you that can help you calculate the increase automatically. If you’re using the manual method, you can generate an improvement recommendation table. In that table, you must include all the information a manager needs to review to make an effective decision about payments.
The following formula can be used to calculate some of the key areas in how to calculate a manual pay raise percentage:
- Compa-Ratio = Current Annual Base / Mid-Range
- Penetration range = (Current Annual Base – Min Range) / (Max Range – Min Range)
- Annual Increase = % Increase * Current Annual Base
- New Annual Base = Annual Increase + Current Annual Base
- New Comparison Ratio = New Annual Base / Mid Range
- New Range Penetration = (New Annual Base – Min Range) / (Max Range – Min Range)
Once you’ve set up an organization-wide table, divide it by division or manager with the right level of input. For that you can meet your manager directly to study the table and discuss how to calculate the percentage increase in salary. Explain to them what’s in the sheet, and any parameters or guidelines if they can edit the suggested improvements.
2. Performance or Proficiency-Based Advancement
If you decide to base your salary increase percentage on employee skills or performance, you can use a matrix to calculate your increase. You will then determine the salary based on position in range and performance or proficiency, whichever you wish to award.
Here again you will start with the percentage increase in the organization’s overall budget based on how to calculate the percentage increase in the selected salary. Then allocate increments to employees based on reach penetration and performance.
A higher increase will be given to those who exceed expectations. Lower increases count for those that meet expectations or don’t, and those higher up in their range.
Again, an easier way of calculating pay raise percentages is with an automated compensation management system. It can also be done manually if needed. From here
You will follow the same path as market based increments i.e. start by charting, break it down by division or manager, coach your manager and provide clear guidance on how to calculate the percentage increase in salary.
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Important Things to Look For in How to Calculate Salary Increase Percentage
1. Consider the performance of each employee
A good place to start when evaluating and determining a raise is to examine each employee’s individual performance. Did their success add value and make a difference?
To do this, view each employee’s most recent performance review. You can use this data to identify whether an employee has exceeded performance goals and targets in the past year.
An employee, for example, may have mentored another employee, introduced a new system to the business or given up their business for additional responsibilities. Some employees may have delivered important projects before deadlines or above and beyond your expectations.
You can also consider their attitude towards work and performance, do they have a positive impact on other employees? Have they introduced new knowledge into the business that other colleagues are already leveraging? Your performance review is an important document to get started on how to calculate a pay increase percentage.
Employee performance appraisal is very important to be carried out by the company’s HR team. Through the employee performance appraisal application , it is easier for the HR team to assess employee performance and integrate it with the company’s KPIs.
2. Weigh your employees’ responsibilities
Review each employee’s job description to clarify their responsibilities. Then note any additional responsibilities your employees have that are not listed in this document. You may find that certain employees assume more responsibility than their job description suggests.
If an employee has taken on more responsibility, you should include this in how to calculate the percentage increase in salary. You should also formally revise their job description if their responsibilities justify a formal promotion.
While promotions usually come with a raise, if your business is not in the financial position to offer a raise to suit their broader responsibilities, reassure your employees that you will prioritize a bigger raise as soon as possible.
3. Understand the typical salary for each employee role by market
External market rates should also be factored into how the pay increase percentage is calculated. Employees want to know that they are being paid a fair price for their skills and expertise, so make sure you know what external salaries are common across the sector or industry in question.
Knowing that the wages your employees receive are competitive with the external market, you can make strong arguments in favor of the salary you set and determine how to calculate the appropriate percentage increase.
Not all companies will set a salary that fits the average, of course. The size of the business and the region in which the company operates can play a role. That’s why a good salary guide usually includes a minimum and maximum salary for each role, along with the salaries in some locations. By knowing this standard of salary, you can make a more confident decision about the value of each raise.
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4. Evaluate the skills of your employees
An employee’s expertise and skills can also factor into the decision on how to calculate the percentage for a pay raise, especially if certain skills are universal requirements across a company’s workforce.
To set pay increases that reflect an employee’s skills, first establish a clear definition of the job skills for which you want to compensate the employee. Some skills are easier to define in concrete and measurable terms than others. However, for soft skills like teamwork, for example, set clear criteria by which to measure your employees.
Tips for Discussing Employee Salary Increases
1. Position it in a way that continues to encourage great work
It’s especially important to highlight specific instances when an employee went above and beyond. Then tying it back to a raise can prove to your employees that you are fully aware of their accomplishments and that they will be rewarded for their accomplishments.
If you give a raise just because your organization is doing well without tying it back to hard work, it can sometimes inadvertently allow underperformance.
2. Make a formal announcement
Announce the raise formally, not just in passing. Say why the employee got it, and explain any additional responsibilities expected. Don’t forget to congratulate them on a job well done.
3. Be specific in your explanation
Describe specifically what the employee has done to deserve it. Some managers in the company have announced salary increases within a certain working period, thus motivating other employees. Discuss what the employee has done that added more value to the company and why an increase in compensation is necessary because of it.
4. Discuss face to face
Whether it’s in person, via video chat or over the phone, it’s great for an employee to hear that they got a raise from their boss in person rather than via email or letter. This provides an opportunity for personal exchange, including commending them for certain things they have done for the business that warranted a raise. Doing this makes it a much more interesting experience.
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5. Holding company meetings
It is always useful to make the most of an opportunity like this. Hold a company meeting, invite everyone and announce to the public who exceeded expectations and got a raise. It gives other people something to aspire to and you get free publicity among your employees.
6. Tell them what made you decide to promote them
When it comes time to reward good employees, you should always let them know what benefit your decision is based on. This lets them know the direction you think they should proceed for both your personal preferences and the needs of the company. Give very clear feedback such as, “I am very impressed with…and because of it…” during the face-to-face meeting.
Employee Salary Increase Benefits
1. Increased Employee Competition
Linking employee salary increases to performance reviews can promote a more competitive workforce. This can result in higher levels of productivity as each employee strives to increase sales or achieve targets to score the highest at the next performance review.
Performance-based pay scales should take effort to reach the next level of salary increase. Having a raise that employees can achieve solely through seniority can reduce competition in your workplace and slow down the overall productivity rate of the business.
2. Linking Pay and Performance
Employees respond with an increased ethical value and concern for duty when a raise directly reflects their level of performance. Linking salary increase incentives to performance reviews can help the workforce in your business better understand what it takes to earn a higher salary and that your company values employees who choose to work hard and outperform others.
It also helps new employees who can see your company not only rewards employees for longevity, but instead chooses to reward workers who consistently improve their performance.
3. Eliminate Underperforming Staff
If earning extra cash doesn’t motivate an employee to work harder, not much else will work. Performance-based pay is an easy way for your business to weed out underperforming employees who have no desire to compete with fellow employees or lack the skills necessary to produce at high levels.
It is important that you provide additional training to struggling workers to ensure each employee has a chance to succeed before you decide to terminate the relationship and lay off workers.
4. Provide Rewards for Employees
A raise is a measurable way of showing an employee’s praise or appreciation for high performance or a job well done. Linking salary increase incentives to performance evaluations provides companies with a clear means of showing employees that the company values high productivity and is willing to reward employees for that effort.
This increases the morale of the workforce and can even lead to increased productivity as employees feel loyalty to the company because superiors show loyalty to their employees.
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How to Calculate the Percentage of Salary Increase by Using Supporting Applications
As previously explained, an increase in employee salaries is quite important and provides many benefits for the development of the company.
Therefore, until now almost all companies have special plans and considerations to give employees salary increases of several percent, depending on the performance and achievements of these employees. However, managing employee salary increases sometimes brings its own challenges, especially for newly established companies.