Annual Raise Recommendations: Context is King for Managers

Annual raise recommendations from managers are often arbitrary—and may even perpetuate and amplify unfair compensation practices. Without the data they need to make informed decisions, managers may decide to give each employee the typical 3 percent raise. Or, they may allow their obsession with round numbers to dictate a $5,000-10,000 raise for employees they deem worthy. But these aren’t the best ways to distribute raises. Some employees may be underpaid and deserving of a higher increase, while others may be above band and require a promotion in order to earn a pay increase. Set your managers up for success by giving them the information they need to make stronger annual raise recommendations.

Help managers understand how employees reached their current compensation level

Managers often inherit people they didn’t hire, and won’t know the history behind each person’s current compensation. Some will be underpaid if they received an offer based on what they earned at their previous employer, or if they’ve had so many manager changes that raises have been overlooked. Others may be overpaid if they negotiated their starting salary, or if they received raises based on a previous manager’s favoritism. 

As a result, your employees’ compensation may not be well aligned with how you value them. Merit-based manager raise recommendations help you pay your top talent what they’re worth, so you can retain them.

Providing managers with historical context around what employees earn can help them make more informed recommendations. Let’s look at two top performers as an example. One is a tenured employee who had a long-standing relationship with her previous manager. She was brought on near the top of the salary range and received hefty raises each year. The other top performer is a relatively new hire who has quickly proven herself to be a valuable asset to the team. She was brought on near the bottom of the salary range, and didn’t receive a raise in her first year because her manager left just before the focal cycle. 

Without context, the new manager may give each of them the same raise amount or percentage increase. But, armed with historical compensation information, the manager may deem it fair to give the underpaid employee a significant raise that’s more aligned with her value to the company.

Provide managers with salary range data

Pay transparency practices can vary widely from company to company. At some, only HR and finance teams are privy to them, while other organizations publish all salary data for the world to see. Pay transparency may also vary by job level, so managers have access to slightly more information than their team. For example, employees might know the salary range for their job level, while managers know the ranges for each employee’s level as well as the level above them.

Sharing employee salary ranges with managers can be helpful when planning for annual raises and promotions. Armed with this data, they can see how much room each employee has for salary growth, and advocate for their employees to earn what they're worth. They can also see when an employee is nearing the top of their salary range, so they can begin preparing and advocating for a promotion.

If your organization isn’t ready to share salary ranges with managers, you can use range penetration instead. Range penetration compares an employee’s salary to the total pay range for their position. 

Range penetration = [(employee’s salary - range minimum) ÷ (range maximum - range minimum)] x 100

So, an employee with a $125,000 salary and a range between $100,000-150,000 would be at 50 percent penetration. A tenured top performer should, generally, have a range penetration closer to 100 percent, while a new hire is typically on the lower end.

Managers can use this data to see whether employees are above or below band, and whether there is room to grow. Again, this justifies them to advocate for higher pay raises for underpaid employees, while suggesting more moderate increases for others. Just make sure managers know that going to the top of the salary band can put them in a bind later on. If the employee isn’t ready for a promotion before the next focal cycle—or there won’t be an open opportunity for them—you may not have anything additional to offer them.

Final thoughts

While your compensation strategy can help you make enormous strides toward pay equity, annual raise recommendations from managers are crucial for retaining your top performers. But managers often assign arbitrary raises because they don’t have the data needed to make more strategic recommendations. Give your managers the context they need to make informed decisions, and provide some guidance on how to best use it. In turn, managers can better align with your compensation strategy and retain their teams.