Why it may be in your best interest to raise wages

Before you start handing out raises, there are some things to consider:

• What is the reason for giving a raise?
• Is it to reward your top-performing employees?
• Are company-wide raises long overdue?
• Is it to retain your best employees in a competitive market? Did the cost of living go up in your area?

How you answer these questions is important for keeping your employees happy, but it also forces you—the business owners—to consider whether you can even afford to increase wages. Of course, there are many reasons for giving your employees a raise, such as improving company morale, inspiring motivation, and retaining your talent. But it’s equally important to determine if providing a pay raise makes sense financially. For example:

• What will it continue to cost you if you’re underpaying your employees?
• What will your company gain in terms of productivity after increasing wages?
• Can you raise salaries and still hit profitability targets?

If you determine that the benefits of giving a raise outweigh the profitability risks, there are three ways you can raise your employees’ wages:

1. Everybody receives the same wage increase

Configuring a set dollar amount or percentage to give all employees the same wage increase may seem like the easiest way to give raises, but the repercussions will tell you differently. It’s doubtful that all your employees contribute the same effort and produce the same results. There’s usually a sliding scale when it comes to productivity:

• A top employee or two who continuously put in extra effort and excel beyond targets
• The average employees who maintain expected targets
• The employee who gets by with minimum targets and has no desire to do more

You can see where this is leading—the employees who overperform may lose their incentive to give that extra effort if you reward everyone equally. Offering the same wage increase can affect your company morale and lead to your best employees looking for a new employer who sees their value. Alternatively, the employee who didn’t deserve a raise will continue putting in minimal effort and expect another raise. This method is only fair when the raise strictly covers a cost of living increase for employees in the same geographical location.

2. Raises according to current market rates

Employers need to stay on top of market demands regarding wages. Know the rates for similar positions, and don’t wait until key personnel resign for more money from competitors. Alternatively, you may run into the same problems above if you have more than one employee holding similar positions. Company seniority is important to recognize—it means you have loyal employees.

When a new hire starts at the same wage as a more experienced employee because that’s the market rate, you should raise the salaries of your more experienced employees to acknowledge their years of service and boost morale. Low morale, especially among experienced members, can spread rapidly through the ranks and affect productivity and stability.

3. Performance-based raises and additional offers

For some employers, productivity and performance are the only metrics that matter, so they raise wages accordingly. Business owners with this mindset pay senior employees and newcomers the same salary if performance and productivity are similar. Performance-based raises involve having a manager or supervisor meet with each employee to set some individual targets. This process is called an employee performance review.

Some companies perform these reviews every quarter, after every six months, or at least once a year. The employee performance review is your chance to:

• Check in with your employees to see how they’re doing
• Offer feedback if there are negative issues
• Offer recognition and praise when deserved
• Offer training if necessary
• Coach and motivate
• Set reasonable targets for productivity
• Set goals for performance

When you schedule your follow-up performance review, evaluate your employees’ progress in meeting their targets, and give raises accordingly.

Wage increases aren’t the only thing you can offer when employees reach their goals. You can also make the following taxable and non-taxable offers:

• Cash bonuses: Rewarding your employees with an extra monetary benefit is counted as part of the employee’s taxable income.
• Gift cards: Providing employees with performance-based gift cards is considered a non-cash, non-taxable reward if the card is only redeemable at a single retailer or group of retailers, it cannot be converted into cash according to the retailer’s terms and conditions, and you keep a log recording all relevant information about rewarding the card. A near-cash card, on the other hand, does not meet one or more of the above conditions, making it taxable.
• Points awarded for company merchandise: If you have a points-and-awards system in place, keep in mind that the fair market value of any company merchandise obtained from redeemable points is included in tax calculations. If the value of that merchandise exceeds the $500 annual non-cash gift and awards limit, the excess amount is taxable for the employee.
• Friends and family discounts: Though not explicitly mentioned in online information made available by the CRA, rewarding employees with friends and family discounts is most likely considered non-cash, making it non-taxable. If the total discounted value exceeds the $500 annual limit, the excess amount is taxable.
• Paid vacation days: Offering paid vacation days is part of an employee’s compensation package and regular salary. Extra paid vacation days are usually treated as regular taxable income and become subject to payroll deductions.

The performance review is your chance to get to know your employees. Customize their rewards to their preferences, securing their loyalty and motivating them even more.

There is a possibility of backlash with performance-based raises. When using money as motivation, some employees stop focusing on quality and only worry about quantity. Performance-based raises can also cause friction among employees who compete to get the highest raises. While some may say healthy competition is good for business, it’s counterproductive when it becomes extreme and employees stop collaborating toward the same goal. The key is balance. Include a clause in their performance reviews regarding quality and continued collaboration to prevent destructive behaviour.

Why are salaries rising?

The candidate-centric job market, labour shortages, and strong economic growth have led to the most substantial rise in wages in years. Employers are competing like never before to hire top talent to fill vacancies for everything from the construction field with skilled and general labourers, to finance, engineers, and IT personnel. Moreover, employers often need to raise wages to remain competitive whenever a labour shortage happens.

What caused the labour shortage?

In the spring of 2020, more than two million workers lost their jobs due to lockdowns. The two reasons that impacted the market the most include:

The great resignation

In 2022, Canada’s strong economic recovery and massive employee resignations led to a labour shortage. People had time to think and put things into perspective during lockdown days. They changed their priorities to include wanting to work at a job they enjoyed instead of one that just paid the bills. When employers started calling people back to work, employees had already found another job or were still exploring other employment opportunities. With so many open job positions and rising salaries today, people are returning to work but on their own terms.

The great (un)retirement

The youngest baby boomers are almost 60 years old and close to retiring. They were already retiring in large numbers before the pandemic; when it finally came about, many held off. These days, that generation has been feeling safe enough to enjoy retirement. As a result, we’ve been seeing many retirees, creating more open job positions, but we’re also seeing many retirees returning to work.

The biggest trends to pay attention to

If employers only raise wages to retain and hire top talent, it may not be enough. You can also consider:

Remote and hybrid work

Employers can offer remote or at least hybrid work to be the most desirable to top candidates. Businesses stuck in the traditional nine-to-five job setting are losing employees to employers who offer flexible working conditions. Most office-type work has been trending to remote and hybrid environments because employers recognize the importance of having a work/life balance. With remote and hybrid work, employers can take a new approach when managing their staff, be more flexible with scheduling, and consider outsourcing freelance or contract workers.

New work style of the new generation

Millennials and Gen Zers are quickly becoming the primary source of employee talent. However, with these new generations come some unique needs. Millennials and Gen Zers have career goals structured by their socially conscious awareness, where they highly value a work/life balance. As a result, employers can get creative with what they add to their benefits packages. Besides competitive salaries and advanced technologies that allow remote and hybrid work, employers can also embrace modern benefits like job flexibility and wellness perks to attract future employees.

Training and upskilling instead of wage increases

With the job market shortage and the search for skilled workers becoming more competitive, there’s no better time to start an in-house employee development and training program. The cost of top talent may be out of financial reach for some employers, but training and developing your existing workforce is fairly
economical—it can also help you strengthen employee engagement, loyalty, and the long-term value of your organization. Here are some of the different ways that employee development can look in your organization as an alternative to wage increases:

• Integrated training programs: By combining formal training sessions for a specific group with cross-functional workshops, you ensure employees are trained on roles and responsibilities normally outside of their scope. This prepares them for diverse roles in the company and enhances team collaboration.
• Comprehensive skill enhancement: Vital soft-skills training in leadership, communication, and problem solving, combined with in-house or external courses for certification brings new skills and insights into the company, enhancing productivity.
• Mentorship and innovation initiatives: Pairing experienced employees with newer ones for knowledge transfer and a sense of belonging can be great for morale. Add innovation labs into the mix to spark novel ideas among the older and younger workforces, leading to new products or process improvements.

Offering training and upskilling instead of only wage increases also typically includes the following benefits for both employers and employees:

For employers

• Enhanced retention and productivity: Investment in employee development signals a company’s commitment to them, enhancing loyalty and reducing turnover. Having well-trained employees also leads to operational efficiency, increasing productivity.
• Growth and adaptability: Employee development fosters new skills and ideas, contributing to innovation and growth while enhancing the company’s ability to adapt to rapid market changes, new technologies, and evolving business strategies.

For employees

• Career advancement and knowledge acquisition: Development programs prepare employees for higher roles, offering clear pathways to more responsibilities and new knowledge. This allows them to feel valued by the company and broadens their professional appeal within and without the organization.
• Job satisfaction and personal growth: Employees experiencing investment in their growth typically exhibit higher job satisfaction and engagement, while the emphasis on personal development and achievement contributes to their overall
  wellbeing, reflecting positively on your company.

Offering competitive wages and performance-based rewards or incentives can be effective strategies to attract and retain top talent. It’s a balanced approach that includes comprehensive benefits, remote or hybrid work styles, and opportunities for training and upskilling — a viable alternative to wage increases that can significantly aid employee satisfaction and loyalty while enhancing productivity. Adapting to these kinds of flexible work arrangements helps provide a meaningful work-life balance for employees, allowing you to stay ahead of evolving expectations and invest in the future success of your organization.