How To Work Out Salary Increase Percentage: Full Guide

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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