As I mentioned in my article “Hierarchy of Employee Needs”, the best way for employees to get a raise is to get a new job. This allows them to negotiate a higher wage at the new organization. One way of showing that an employee is valued is by giving a regular pay increase each year.
The top reasons to give employees a yearly cost of living pay increase are so you can retain good employees, build trust and loyalty, make employees feel safe and secure, attract good employees, reduce loss of organizational knowledge, and reduce bad turnover rates.
Below I will get into the details of each reason.
Retain Good Employees
Naturally, as an employer you want top performers to stay with you long-term. Your Rock Star employees may account for a large percentage of your revenue or production.
Even though your top performers may already be the highest-paid employees because of performance or merit pay increases you can’t leave them out of any regular yearly increase. If you don’t give them the same basic or regular annual pay increase, they will get upset. Rightly so! They’re responsible for your organization’s success!
People doing good work should be rewarded for their work!
Build Trust and Loyalty
The general perception of labour is that anyone can be replaced because there are a lot of people jobless and looking for work. In this capitalist environment trust and loyalty is hard to earn but may be the key to an organization’s success.
Many people work for years and years for organizations without any pay raise. Personally, if I don’t get a raise every six or twelve months, I start looking for a new job. This causes employees to disengage. They may even start working against the organization.
Trust and loyalty can be earned one small pay increase at a time. It is a constant reminder to the employee that the organization values them and their contributions.
Make Employees Feel Safe and Secure
Employees are looking for long-term security so they can feel financially safe. A good way to give them this safe and secure feeling is a regular guaranteed cost of living pay increase.
If an employee does not think their job is secure, they will not feel safe in protecting their families or livelihood. This is a very basic need. If employees are worried about job security, they will not work hard to keep it. In this case, employees will start a job search for something better.
Attract Good Employees
I already wrote about retaining good employees, but you also want to attract good employees. Top performers in other organizations will be looking for something better if they are not being treated right. You want all top performers in your industry to be considering a move to your organization!
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This means you may be paying more wages, but more top performers may mean incredible increases in revenue or production. If only 20% of your employees are top performers and you’re doing good imagine if 40% of your employees are top performers!
No Loss of Organizational Knowledge
The loss of organizational knowledge can cripple an operation if enough experienced employees leave. I’m not even talking about just top performers, if you lose a lot of average backbone employees you will be in trouble.
Imagine if 20% or more of your employees are brand new and must learn everything from scratch. Production and revenue could drop below the breakeven line for months or years.
Mitigate this loss of organizational knowledge in two ways: cross-train as many employees as you can and give them a yearly cost of living pay increase.
Reduce Bad Turnover Rate
In previous articles, I wrote about general turnover, good turnover, and bad turnover. General turnover accounts for all employees leaving an organization. This may not give you the proper information about what is really happening in your organization.
Good turnover is when employees you consider to be low performers leave your organization. This is good for you because now you can hire more top performers.
Bad turnover is when employees you consider to be top performers or regular backbone employees leave your organization. This is bad because now you’re left with just low performers.
A regular yearly cost of living pay increase can help you keep your top performers and regular backbone employees.
How Much Should Your Cost of Living Pay Increase Be?
This depends on your industry and how well your business or organization is doing. You should always try to give some sort of permanent pay increase each year. This is especially important when times are tough on your organization. You can’t afford to lose employees when the business needs to make more money!
Base your increase on yearly inflation or on an average of 3-5 years of inflation. You could give the full percentage amount or maybe a lower amount when times are tough.
If you think you can’t give a yearly cost of living increase, remember that you have a bunch of “brains” working for you. Ask your employees for advice and they can surprise you!