How to calculate a salary raise percentage: A guide for employers

Excellent performance, tenure, market adjustments—these are all good reasons to give an employee a raise. But calculating the right number isn’t always so clear-cut.

Many organizations use raise percentages to update annual salaries or hourly wages. Converting a dollar amount into a percentage simplifies the process. This approach nurtures consistent practices across the organization, helps compare salaries to market standards, and easily tracks pay adjustments year over year. 

Read on to learn how to calculate raise percentages, strong reasons to ask for or grant a pay raise, and pointers for deciding on a fair percentage adjustment. 

Criteria for a salary increase

Giving some employees a raise might be a no-brainer—especially if they’re exceptional performers. But for the sake of transparency and record-keeping, you need a solid justification to grant a pay raise.

An organization’s compensation philosophy should incorporate clear pay raise criteria based on specific salary benchmarks. For example, a pay increase tied to the cost of living may reflect the annual rate of inflation. In contrast, company loyalty may merit a fixed percentage increase based on the number of years with the organization. Setting these requirements makes it easier to communicate and calculate pay increases—and to justify turning down someone’s request. 

Here are four common cases:

1. Cost of living raise 

At its most basic, a job is an exchange of services for compensation. If salaries fail to keep pace with the cost of necessities or quality-of-life expectations, employees might look for more competitive salaries elsewhere. 

Organizations can proactively implement salary adjustments by conducting a yearly payroll review that considers the regional cost of living. These incremental raises help employees maintain their purchasing power and alleviate the stress of inflation. Additionally, this proactive attitude reflects a commitment to supporting employees’ well-being, fostering a sense of loyalty that benefits both parties. 

2. Merit-based raises

A merit-based raise is a type of pay increase that rewards individual performance. It recognizes workers who consistently perform above and beyond job expectations. A merit increase reinforces desirable behavior, motivating employees to continue doing what they do best and striving to further improve their skill set.

Your people operations team should discuss merit increases during annual performance reviews, whether an employee receives one or not. This way, they can set clear expectations about how to achieve them. This transparency can bolster engagement and productivity across your workforce.

3. Tenure

Recognizing long-term employees through pay raises rewards loyalty, sending a clear signal that the organization values tenure. Tenure-based pay raises foster a sense of belonging and appreciation, enhancing retention and cultivating a positive workplace culture built on mutual respect. 

4. Market rates

The job market ebbs and flows according to basic economic principles. Salaries rise when a role has high demand and a small pool of qualified candidates. To stay competitive, organizations should regularly assess and adjust compensation packages to align with market expectations. This approach to pay increases will keep existing employees from being successfully headhunted by competitors while attracting new talent with valuable skills. 

How much should a salary raise percentage be? 

There’s no standard raise percentage you should use when calculating salary increases. Several factors determine what a good raise percentage is, including region, employee performance, and payroll budgets. 

As a general guideline, annual raises are typically a 3–5% increase for cost-of-living adjustments or merit-based increases. However, in high-demand industries or regional job markets, a 6–10% increase may be necessary to stay competitive and retain good talent. You might use another predetermined percentage increase when raises are attached to promotions.

Ultimately, determining the right percentage increase depends on your organization’s unique circumstances. Regularly review compensation practices across your industry to ensure salary increases are fair, attractive, and aligned with both employee contributions and organizational goals.

How often should you get a raise?

Every organization is free to set unique policies regarding pay raises. Some businesses grant pay increases during annual performance reviews, whereas others might implement merit raises once employees achieve specific objectives. 

Regardless of your pay raise policy structure, you should communicate it clearly to your employees. Transparency about the criteria for earning raises sets fair standards and ensures everyone understands how and why salaries are adjusted. 

Remember that wages play a significant role in job acceptance and employee retention. However, they’re not the only factor influencing an employee’s decision to stick with a company or find a new position. Bonuses, paid time off, and a robust benefits package add value to an already attractive annual salary. They might also be easier on an employer’s payroll budget.  

Simplify pay and compliance with Oyster

Do you need help calculating global salaries for your distributed workforce? Oyster has the answers. The Oyster platform offers country-specific insights on salary, benefits, and equity around the world, so you can confidently build locally competitive packages and meet expectations around salaries, bonuses, pay raises, and more. Learn how Oyster’s Global Payroll service can simplify payroll and ensure fast and hassle-free payments for your global team.

About Oyster

Oyster is a global employment platform designed to enable visionary HR leaders to find, engage, pay, manage, develop, and take care of a thriving distributed workforce. Oyster lets growing companies give valued international team members the experience they deserve, without the usual headaches and expense.

Oyster enables hiring anywhere in the world—with reliable, compliant payroll, and great local benefits and perks.