Declining a Request for a Salary Increase

Declining requests for salary increases can be a difficult issue, especially when you know an employee's performance warrants a raise, but budgets do not allow for it. Fortunately, you can be the bearer of bad news and still help facilitate a positive outcome.

Pay reviews are an important process and often require care and preparation in order to meet your employees’ expectations and ensure that the review is a valuable process. It is also imperative that full explanations are offered as to the reasons and criteria behind why salaries are reviewed. Not everyone may receive a pay increase or at least an increase at the level they were expecting, so it is important that their expectations are managed correctly by fully justifying and preparing prior to undertaking the review. Likewise, you may be in a position to offer someone a pay increase at a higher level than they were expecting. Here, it is important that you fully utilise this situation by praising and congratulating on excellent performance or contribution.

Use a self-evaluation form

A good first step in undertaking robust salary reviews is, a few days prior to the evaluation, to ask your employees to fill out a self-evaluation form. This can often assist in taking the unpleasant surprises out of the review process and helps the employee focus on what has happened during the past year and what she or he hopes to accomplish in the coming year. Other benefits of using a self-evaluation form are:

The employee will be better able to remember what happened in the past year than you will. Without a self-evaluation, you may forget a significant achievement the employee accomplished many months ago. You don’t want the employee to wonder why she is working so hard when you don’t remember the good work.
The self-evaluation gives you an early warning if the employee believes he or she deserves a higher rating / salary review than you do. This will give you time to prepare for any potential discrepancies in expectations.
The self-evaluation lets the employee know you want the review to be a give-and-take session and not just a chance for you to talk.

Prepare for the review

Frequently, the perceived unpleasantness of an employee salary review can make an employer dash through it as quickly as possible. But you’re not doing your company or your employee any favors by not preparing the review carefully. Take the time before each review to:

Review the employee’s job description. Make sure it accurately summarizes the employee’s responsibilities and what competencies are expected. This can help you determine where your employee is meeting or exceeding expectations and where they are falling short.
Review the performance measures you will use for your assessment. Objectives and goals should have been prepared at the beginning of the previous management period. Let your employee know how you’re assessing the achievement of these objectives, and set objectives and goals for the coming period.
Be sure you’re not going to blindside your employee. A review is not the time to spring surprises on someone. If you have negative feedback for the employee, this should have been communicated prior to the review. No one wants to feel ambushed in a review.
Prepare a draft of the performance review as a way to guide the discussion.
Think about what message you want your employee to take from the review. Superior-performing employees, who may be receiving a better pay rise than expected should walk away knowing what their opportunities for new responsibilities are and how to maintain their performance level. Satisfactorily performing employees, who may only receive a standard pay increase, should be able to identify opportunities for their development and discuss with you how to maintain and improve their performance. With poorly performing employees, who may not receive a pay increase at all, you may want to develop a plan for performance correction and try to gain a solid commitment from them to improve.
Write an agenda for the meeting. Include talking points about how the employee has met expectations and opportunities for the employee’s self-assessment. Here is a suggested agenda:
1. Greeting: Start with a warm greeting and some small talk.
2. Summary: Summarize overall performance, including the rating you will give.
3. Strengths: Compliment the employee on what they have done well.
4. Weaknesses: Be specific. Instead of saying ‘you have a poor attitude’, cite specific examples and what can be done to change the bad attitude.
5. Feedback: Listen to what the employee has to say about your comments. Don’t argue, but let the employee know that the feedback has not changed your review.
6. Salary: Recap the review; announce the new salary and the date on which the salary will be effective.
7. Closing: Unless you’re dealing with a poor review, end the session on a positive note, and let the employee know how much the company values them.

Establish a fair rating system

Make sure your rating system is fair and easy for employees to understand. Have each rating translate into what the raise in salary will be. Some suggested ratings and salary increases are:

Unsatisfactory—where the employee’s work is below the minimum level of performance. The employee must improve immediately to continue employment with your company. Suggested pay raise: 0%.
Below average—where the employee’s work meets most of the minimum performance requirements, but the employee must improve. Suggested pay raise: 0-1%.
Satisfactory—where the employee’s work meets minimum performance requirements. If the employee is below average in one or more aspects, this is balanced by an above average or average performance overall. Suggested pay raise: 1-2%.
Good—where the employee’s work meets all of your minimum performance requirements and, in some areas, the employee’s performance is superior. Suggested pay raise 3-4%.
Excellent—where the employee’s work exceeds all of your minimum performance requirements. The employee’s performance in several areas of the job is exceptional. Suggested pay raise: 4-6%.
Exceptional—where the employee exhibits superior work performance in every aspect of the job. In addition, the employee has accomplished one or two projects or goals beyond what was required. Suggested pay raise: 6-10% (and possible promotion).

How to decline a salary increase request

Salary negotiation—asking for a salary increase, a pay rise, or simply more money—affects everyone from time to time. Salary negotiation can be difficult, and many people handle it poorly, causing frustration and ill-feeling. There are constructive ways to approach salary negotiation, though, and techniques to achieve good outcomes.

As a manager, you will need to handle salary negotiation positively. If you encourage people to adopt a constructive approach to salary negotiation, you will help to minimize upset and to achieve a positive outcome. As a manager dealing with salary negotiation or a pay increase request, it’s important to encourage a grown-up, objective, emotionally mature approach. As a manager receiving a request for a salary increase, encourage employees to follow this approach and then respond fairly, sensitively, and openly. Only make promises you can be sure to deliver, and always try to understand the person’s needs, feelings, and justifications for their pay increase requests before you explain the company’s position.

It is important always to recognize the difference between the value of the role that employees perform and their value as an individual. The two are not the same.

There are often reasons that, as a manager, you are unable to influence an increase in pay levels and these need to be clearly outlined. For example, you might find a situation where the limit of the value that can be placed on a particular role has simply been reached, so the decline is not a reflection on their value as an individual. Remember, employees could have a very high potential value, but if their role does not enable them to perform to their fullest extent, then their reward level may be suppressed.

Salary levels are largely dictated by market forces—notably the cost of replacing the employee—and the contribution that the employee makes to organizational performance. This is particularly relevant for roles that directly impact on profitability. Allowing employees to acknowledge this principle means they can then begin to take control of their earnings. If you find that the gap between your employee’s expectations and your salary limit is too great to bridge, however, look to find or develop a role which commands a higher value, and therefore salary. You can do this by agreeing on wider responsibilities, opportunities, and targets for employees to contribute to organizational performance and profit.

Focus on developing an employee’s value to the organization, rather than disappointing them by not increasing their salary for what they are already doing.

If you are not able to facilitate a pay rise at the time, then the most positive way to approach this is to re-evaluate an employee’s contribution and responsibility and link this to a pay rise—if not immediately, then in the future. This is an approach that employees often respond to better than simply telling them that they are not entitled to a pay increase either now or in the future.

Another positive approach is to devise a performance-related bonus or pay increase subject to achieving more, based on standards or output greater than current or expected levels. This again should be received positively by the employee because you’re offering something in return by justifying how an increase in pay can be obtained.

Reasons to justify declining a pay increase request

Market rates—an employee may actually be paid well for the role that they are currently doing (use salary surveys to support your argument).
The company’s position concerning staff turnover, retention, recruitment, and headcount (that is, increasing, reducing, or static; in accordance with planned levels or not).
The company’s trading performance (relative to budgeted costs and planned sales and profitability. Be honest about the current company situation).
The available budget your company has for pay rises (which is usually none, apart from annual salary review time).
What precedents would be set for other employees by allowing the rise (this is often a significant issue for many employers).
How much extra responsibility an employee is prepared to take on to justify the increase.
How much extra effort employees are prepared to put in to the job and how ambitious they are.
Is the request justified? If not, explain why and fully ascertain why an employee feels they are justified an increase. If so, put measures in place to ensure they receive an increase at their next review.