How to Plan for Employee Raises: A 2025 Guide for Employers

Rising living costs are forcing employees to take a closer look at their paychecks. If your company isn’t doing the same, you risk losing top talent to better offers. Salary increases are more than a financial line item. They’re a strategic tool that can improve retention, morale, and business outcomes.

In this article, we’ll walk through the key types of raises, how to calculate them, and how to build a raise strategy that supports both your people and your bottom line.

Table of Contents

• Why Salary Increases Matter in 2025
• Common Types of Salary Increases
• How Often Should Raises Be Reviewed?
• Budgeting for Raises: What to Consider
• Salary Increases are an Investment in Retention
• Tools to Streamline Your Raise Process

Why Salary Increases Matter in 2025

Raises have become a business imperative. According to WorldatWork, U.S. employers planned an average 4.4% salary increase budget in 2024, with more businesses shifting to mid-year adjustments. Why? Because pay is still the number one reason employees leave their jobs.

The good news is, when done right, raises can reduce turnover, reward performance, and build a loyal workforce. It all starts with planning.

Common Types of Salary Increases

Understanding the reasons behind a raise can help you apply them more consistently and equitably.

1. Merit-Based Raises

Tied to job performance or KPIs. These raises recognize employees who meet or exceed expectations and contribute meaningfully to business goals.

2. Seniority or Tenure Raises

Often outlined in employment contracts or policies, these predictable raises encourage loyalty and reduce turnover.

3. Cost of Living Adjustments (COLAs)

Used to help employees maintain purchasing power during inflation. While not always guaranteed, many employers are offering COLAs to support retention.

4. Pay Band or Market Adjustments

Helps correct pay imbalances between long-time employees and new hires. Conducting internal salary audits is one of the best ways to ensure fairness.

How to Calculate a Raise

There are two standard ways to calculate raises: flat rate or percentage-based.

Flat Raise Example

This is typically offered after a set period of employment or at the end of a probationary period.

• Previous salary: $50,000

• New salary: $55,000

• Monthly increase:
  $55,000 ÷ 12 = $4,583
  $50,000 ÷ 12 = $4,167
  Monthly increase = $416

Percentage Raise Example

Used for promotions, performance-based raises, or inflation adjustments.

• Current salary: $70,000

• Raise: 6%

• Calculation: $70,000 × 1.06 = $74,200

• Increase: $4,200 annually

Use your payroll software to automate raise calculations and ensure consistency.

How Often Should Raises Be Reviewed?

Raise frequency depends on your compensation strategy. Common approaches include:

• Annual Reviews: Align salary discussions with performance reviews and fiscal planning cycles.

• Work Anniversary Reviews: Tailored to each employee and often easier for smaller teams.

• Promotion or Role Change: Raises should reflect added responsibilities or new roles.

• Ad Hoc or Market-Driven Reviews: Useful in periods of high inflation or when internal pay disparities arise.

You can also build in eligibility timelines for newer employees. For example, an employee might be eligible for their first raise after six months, then annually thereafter.

Budgeting for Raises: What to Consider

Raises require careful planning. Here are some key factors to evaluate:

• Revenue and cash flow

• Current payroll as a percentage of expenses

• Industry salary benchmarks

• Regional cost of living trends

• Pay equity across departments and roles

Model different raise scenarios using your workforce data. You may find that offering smaller COLAs combined with larger merit raises for top performers balances both retention and cost.

Salary Increases are an Investment in Retention

Raises cost money, but so does turnover. According to Gallup, replacing an employee can cost up to two times their annual salary. Raises also help improve morale, job satisfaction, and productivity.

When employees feel valued and fairly compensated, they’re more likely to stay, contribute, and grow.

Tools to Streamline Your Raise Process

Excelforce offers integrated tools to help you streamline compensation planning, manage approvals, and ensure compliance:

• Payroll: Handle increases accurately

• HR Compliance Services: Navigate wage laws with confidence

• Benefits Administration: Support total compensation transparency

• Advanced Scheduler: Control costs in shift-based environments

• Recruitment: Attract talent with competitive offers

Curious what else you can automate? Start with our blog on How to Automate Payroll.

Keep Learning with Excelforce

Explore more helpful content:

• The Complete Guide to Employee Scheduling

• How to Cut Payroll Waste: 5 Proven Strategies to Reduce Overtime and Cut Labor Costs

• A Complete Guide to Annual Leave & PTO for US Employers

©2025 - Content on this blog is intended to provide helpful, general information. Because laws and regulations evolve, please consult an HR professional or legal expert for guidance specific to your situation.