A pay adjustment is any change made to your employee’s salary. The change can be an increase or decrease in their compensation. It can also be permanent or temporary. Moreover, it can apply to a single employee or to the entire salary structure, where all employees can get an adjustment.
Key Takeaways:
- Pay adjustments help with retention, ensure compliance with minimum wage laws, and promote pay equity
- Besides for compliance, it can also be done for promotions, cost of living obligations, for job market competitiveness, and even for temporary reasons, like one-off projects
- Before adjusting salaries, take note of anti-discrimination laws, the Equal Pay Act, and employee classifications to avoid legal trouble
There are many reasons why a company will implement a pay adjustment. Read on to find out when to make a salary adjustment, how to make it, and the legal compliance issues to look out for when making them.
When to Make a Pay Adjustment
Salary adjustments can be influenced by internal and external factors. You can do an adjustment based on the employee’s performance or based on the market situation. Here are the most common reasons:
Employee Retention
When there’s a high demand for specific skills, there’s a possibility that your top employees will leave if they’re offered better or higher compensation. Thus, giving salary adjustments can be a strategic move to retain your top talent by ensuring that they receive a competitive salary.
Promotion/Demotion
When an employee receives a promotion, their salary also increases concurrently with the more complicated responsibilities of the new position. Conversely, an employee’s salary decreases if they get demoted to reflect the change in their job level.
Changes in the Cost of Living
Companies conduct regular compensation reviews and adjust salaries (if necessary) if there are changes in the cost of living where the employee lives. The company then makes pay adjustments to ensure employees maintain their standard of living.
Pay adjustments can also be done if an employee is assigned to a new geographical location. For example, if that new location has a higher cost of living than the region where the employee previously lived, you must increase their salary to keep up with the higher expenses.
Maintain Salary Equity
When employees have the same responsibilities but have different compensation levels, it could greatly impact their morale. To ensure fairness and promote trust, a company needs to ensure that those who perform the same responsibilities receive the same amount of compensation. Furthermore, providing fair compensation protects employers from allegations of discrimination.
Market Adjustment
A market adjustment raise is done in an employee’s salary to align it with the prevailing market rates for similar positions. This type of salary adjustment is often made to make sure that a company’s salary structure remains competitive based on industry standards.
Layoff Prevention
An economic crisis might lead a company to implement salary adjustments (often a salary decrease) as a countermeasure to prevent layoffs and retain their top talents. A classic example of this was during the COVID pandemic, where some companies implemented salary cuts instead of resorting to layoffs.
Length of Service
It is common practice for companies to give employees a raise to recognize and reward their loyalty and commitment to the company. Tenure-based compensation is also a strategy to attract and retain experienced employees in the organization.
Temporary Adjustments
Salary adjustments are also implemented as a response to short-term changes like additional responsibilities or project demands. For example, an employee got sick and another employee had to take over the sick employee’s responsibility for a certain period of time. The company will then compensate the employee for taking those extra tasks or working the additional hours. Such flexibility allows the company to adapt to changes without making permanent changes to the salary structure.
Pay Adjustment and Legal Compliance
When making salary adjustments, make sure that it is fair and in compliance with the existing employment laws. Here are the different areas you need to be on the lookout for:
Anti-discrimination laws, such as Title VII of the Civil Rights Act, safeguard the rights of individuals that belong to the protected characteristics (gender, race, age, disability, religion, etc.). When implementing salary adjustments, make sure that they are not reflective of discriminatory practices.
The Equal Pay Act requires employers to provide equal compensation to employees who perform the same work in the same workplace. As you are adjusting salary, make sure that you’re not unintentionally creating disparities that could create gender-based wage discrimination claims.
Understand the criteria for exempt and non-exempt employees based on the Fair Labor Standard Act (FLSA) classification. Exempt employees are those who hold executive and administrative positions and are not entitled to overtime pay. On the other hand, non-exempt employees are those who are paid by the hour and have roles that involve routine or manual work. Business owners are required to regularly adjust the salary of non-exempt employees to ensure they meet the minimum wage requirements.
How to Make a Pay Adjustment: 5 Simple Steps
Salary adjustments are a sensitive topic; thus, you need to approach the matter with care. Here are a few tips to ensure a smooth and seamless process:
Step 1: Conduct a Comprehensive Compensation Review
Before initiating a salary adjustment, conduct a thorough review of the company’s compensation structure. Look at the current salary levels, taking into consideration industry benchmarks, market rates, and geographical locations. After that, identify the areas where adjustments might be necessary to ensure your compensation package remains fair and competitive.
Step 2: Identify the Purpose of the Salary Adjustment
The purpose could be to attract top talent or to boost employee morale. Perhaps, it is to recognize the contribution of exceptional employees. No matter what the objective is, clearly defining the purpose of the salary adjustment ensures that any decision made aligns with the company’s objectives.
Step 3: Discuss With Relevant Stakeholders
Whether the salary adjustment is wide-scale or only concerns a single employee, you should discuss it with both the company executives and managers who will be affected by the adjustment. By discussing it with the leadership team, you’ll be able to check whether the increase is feasible. Additionally, you should also notify the immediate supervisor of the employee(s) who will be affected by the change.
Step 4: Notify the Employee About the Changes
Even if the supervisor/manager had notified the employee, it is important to talk to the employee about the pay change in a one-on-one private conversation. Be transparent as to why there’s a salary change. Clearly identify the factors that have been considered in the decision-making process. Also, emphasize the company’s commitment to providing fair and competitive compensation. Most importantly, provide the employee with a written notice of the salary adjustment.
Step 5: Be Careful With Payroll Adjustments
Once the adjustment takes into effect, be careful when processing payroll adjustments. Work closely with the payroll department to ensure that the implementation is accurate and on time. Double-check the calculations to prevent any discrepancies. Payroll errors can be avoided by integrating payroll software with your payroll system. It also streamlines your payroll process by automating it. If you need some guidance on how to do this, read our guide on how to do payroll.
Bottom Line
Salary adjustment can have a positive or negative impact on an organization, depending on when and how it was implemented. Thus, it has to be done carefully by identifying why it is needed in your company and creating a process on how to do it.
Whether you are calculating payroll or making payroll adjustments, this process is made easier with a dedicated full-service payroll like Gusto. Aside from handling payroll, it also has some solid HR features to help you with employee management.
