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Business Math: When to Use Flat Rate Pay Raises

Every so often it’s time to give your employees raises. When and how you give those raises is entirely dependent on you. You have the choice to give raises by a percentage or flat rate. Most businesses calculate raises by percentage and we have a great article on that topic here. In this article, we’ll be focusing on the flat rate raise.

Calculating an employee’s raise by flat rate is a pretty simple process. As the name implies, a flat rate raise is a dollar-amount increase to an hourly wage earner’s hourly pay. If an employee earns a salary, the flat rate raise is an increase to the annual salary amount that you would then calculate on a per check basis.

When to give flat rate instead of a percentage increase

Flat rate raises are great for one-time adjustments to an employee’s pay. This is useful for times when an employee is hired on at a lower rate than they might typically deserve. Sometimes employers might hire an employee for less money than they would normally pay during an evaluation period. In this case, some employers will elect to give a one-time flat rate raise to adjust that employee to the proper pay level and then go with percentages thereafter.

Minimum wage employees don’t feel percentage increases

According to Aon’s annual survey on U.S. salary increases that surveys more than 1000 companies, the average pay raise in 2019 is expected to be about 3.1%. For employees earning minimum or near minimum wage, a typical raise percentage would amount to very little money. In this case, a flat raise might make more sense when you’re trying to reward an employee or show them that you appreciate their hard work.

For example, if you give an employee who earns just $7.25 per hour a 3% increase, that employee would only earn an extra 22 cents per hour. If that employee was working full time, the raise would equate to under $40 per month, or about $450 per year. This might be an appropriate amount, but if you’re trying to show the employee some extra appreciation, a flat rate raise would be a better choice.

Other considerations: Future Raises

Depending on the circumstances, some employees may see raises as precedent-setting. Make sure you’ve made your employee aware of the context of the raise so they know what to expect in the future. If an employee is earning far less than they should, it’s better to frame a large raise as it terms of a flat rate. For example, suppose you have an employee who just graduated from college and expects a large increase. Suppose she earns $20 per hour, but her peers all earn around $30. If you want to keep that employee from leaving for greener pastures, you’ll need to give her around 50% to make her happy. But a 50% increase could set her expectations for future raises to unrealistic levels. In this case, a flat rate raise would be the way to go.

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