How To Work Out Salary Increase Percentage: Full Guide

Giving employees a raise is one of the most important financial decisions a business owner can make. But how do you calculate it fairly? Whether you’re managing a team or running a solo operation with hourly help, understanding how to work out salary increase percentage is essential for budgeting, retention, and team satisfaction.

This guide walks you through the math, best practices, raise types, and communication strategies to help you reward fairly and sustainably.

In this guide, we’ll cover:

• What a salary increase percentage is and why it matters
• Key factors to consider when giving a raise
• How to determine fair raise percentages
• Industry averages and cost of living adjustments
• Flat-rate vs. percentage-based raises
• Step-by-step salary increase percentage formulas (including in Excel formula examples)
• Additional benefits to consider beyond salary
• How to communicate raises effectively

What is a salary increase percentage?

A salary increase percentage shows the percent change in pay an employee receives when their salary goes up. It’s calculated by comparing the difference between the old and new salary against the original salary.

Formula: (New Salary – Old Salary) ÷ Old Salary × 100 = Salary Increase Percentage

Example: If an employee’s annual salary rises from $50,000 to $52,000: ($52,000 – $50,000) ÷ $50,000 × 100 = 4% increase

According to ADP, the average salary increase in the United States in 2024 was 4.8%.

Key factors for a salary increase

When deciding raises, business owners and HR managers should consider:

• Employee performance: Results from performance reviews, job descriptions, and measurable contributions to company goals. Consider whether the employee receives consistent positive feedback or exceeds expectations.
• Cost of living adjustment (COLA): To keep pay competitive with inflation and cost of living increases in your region. Many companies tie annual salary raises to a COLA percentage.
• Market benchmarks: Salary calculators, salary negotiation data, and industry reports provide guidance on average salary ranges and ensure fairness.
• Company financial plans: Whether gross pay increases align with budgets, revenue projections, and long term financial plans.
• Retention goals: Salary hikes reduce turnover and support long term growth by rewarding loyalty and improving employee satisfaction.
• Other benefits: Beyond dollar amount increases, consider health insurance, bonuses, or flexible work options as part of the overall compensation package.

For more financial planning insights, check out our guide on writing a winning business plan.  

How to calculate a raise?

The right salary hike percentage depends on:

• Average raise percentage in your industry: According to Patriot Software, typical raises are between 3–5%.
• Role type: Hourly wage employees may receive raises based on hours worked, while annual salary employees often receive percentage adjustments.
• Performance vs. tenure: High-performing employees may justify higher raises than tenure-based adjustments.
• Business conditions: Financial stability, profit margins, and growth outlook.

How much should a pay raise percentage be?

• Standard raise: 3–5% — This is the most common range for annual salary raises, keeping pace with inflation and market averages.
• Cost of living increase: 2–3% — Many employers add a COLA adjustment annually. According to the Bureau of Labor Statistics, inflation averaged around 3% in 2023, making this a fair benchmark.
• Merit-based raises: 5–10% depending on employee performance — High performers who exceed goals may receive larger adjustments. For example, Nelson Connects suggests merit raises are key for retention.
• Promotions: Often 10% or more — Promotions that come with new responsibilities typically warrant higher salary hikes.

Business owners should balance competitiveness with sustainability to ensure raises don’t strain budgets. For informational purposes only, employers are advised to review salary calculators and financial plans to confirm the dollar amount and percent change work for both the employee and company.

How often should an employee get a salary raise?

• Annually: Most common, tied to performance reviews. For example, many companies align raises with the annual review cycle each January.
• Every 2 years: For smaller businesses with tighter budgets, a biennial raise cycle can be more sustainable.
• Ad hoc: Raises can also be given outside of the cycle for promotions, market adjustments, or to retain top performers during salary negotiations.

Best practice: Review salaries yearly, even if not every employee receives a raise. According to SHRM, conducting annual reviews and salary discussions improves employee retention and provides transparency in pay rise practices.

When Is the Best Time to Give a Salary Increase?

Timing matters just as much as the amount of the raise. Employers should align increases with moments that demonstrate both company strength and employee contribution. Common best times include:

• After annual performance reviews: Tie raises to measurable performance so employees clearly see the connection between effort and reward.
• Following company profit growth or securing new contracts: Share success with employees when the business is thriving.
• During salary negotiations when retaining key staff: If an employee receives another offer, a timely raise may help retain them.
• To offset cost of living increases or inflation spikes: Adjust pay to keep up with rising living costs and maintain employee satisfaction.
• At the end of major projects: Reward employees who went above and beyond on high-impact work.
• During budgeting cycles: Many companies incorporate raises into annual financial planning for better control of gross pay and dollar amount adjustments.

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Flat rate increase vs. percentage raise

Raises can be given as a flat dollar amount or as a percentage of base salary.

Flat rate increase examples

• An employee receives a $1,500 increase to their $40,000 salary = New salary $41,500
• Hourly employee’s wage rises from $18 to $19/hour = $1 per hour raise

Percentage salary increase examples

• A 5% raise on $50,000 = $52,500
• A 10% raise on $60,000 = $66,000

Flat Rate vs. Percentage Raise

How to calculate salary increase percentage

Before diving into the math, it helps to understand why this calculation matters. Knowing the exact percentage change makes it easier to compare raises across employees, check against the average raise percentage in your industry, and ensure fairness in payroll decisions.

Example of how to calculate salary increase percentage

1. Find the difference between new and old salary.
2. Divide that difference by the old salary.
3. Multiply by 100 to get the percent change.

Example 1:
Old Salary = $20/hour, New Salary = $21/hour
(21 – 20) ÷ 20 × 100 = 5% raise

Example 2 (annual):
Old Salary = $55,000, New Salary = $58,300
(58,300 – 55,000) ÷ 55,000 × 100 = 6% raise

👉 Try our Salary Paycheck Calculator to test scenarios.

You can also use Microsoft Excel:
Formula in Excel: =(New Salary – Old Salary)/Old Salary

This formula can be added to any excel sheet or excel template for quick results.

Other work benefits to consider besides salary increase

Sometimes offering alternative benefits can support retention while controlling costs. These perks can be just as valuable as a salary hike, and in some cases even more appealing to employees depending on their circumstances:

• Health insurance: Providing comprehensive coverage or contributing to premiums can significantly increase employee satisfaction.
• Retirement contributions: 401(k) matching or pension contributions give long term value beyond immediate pay.
• Training and development programs: Investing in employee performance and career growth helps with retention.
• Flexible schedules or remote work: Work-life balance benefits are increasingly in demand and can reduce turnover.
• Bonuses or performance incentives: Linking rewards to results gives employees a clear reason to excel.
• Wellness programs: Gym memberships, wellness stipends, or mental health support add to overall compensation.
• Additional paid time off: Granting extra vacation days or personal leave can be highly valued by employees.

Investopedia claims offering a strong benefits package is one of the most effective ways to retain top talent, even when salary raises are modest.

Communicating Salary Increases

How you communicate a raise is as important as the raise itself. A raise that isn’t explained well can cause confusion or even frustration, while a clear conversation builds trust and reinforces employee value. According to SHRM, transparent communication around pay decisions is a key driver of employee engagement.

• Be clear and transparent about the math and percentage change, perhaps even showing the calculation in Excel or a raise calculator for context.
• Frame it within performance reviews and company goals so the employee sees how their work connects to the raise.
• Discuss long term career growth and financial plans, including future opportunities for promotions or bonuses.
• Provide the increase details in writing for clarity, whether as part of a salary letter, HR document, or official communication.

Calculating Salary Increases Fairly

Understanding how to work out salary increase percentage helps business owners balance employee satisfaction with financial sustainability. By using clear formulas, Excel spreadsheets, and raise calculators, you can calculate fair increases, align with industry averages, and maintain long term growth.

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