Cost of Living

• Cost of living and inflation are the most justifiable reasons for raising salaries. Salary increases based on the cost of living in various geographic locations are usually standard protocol when an employee is transferring to another work site or business location. Within organizations that have several work sites and locations, there might be a relocation specialist who calculates exactly what it costs to live in another locale. Employers who raise salaries for cost of living, relocation and expatriate working conditions sometimes raise employee salaries to compensate for convenience.
  
  

Merit Increase

• Although many employees and managers consider performance appraisals their least favorite tasks, receiving a merit increase overshadows the dreadful evaluation exercise. Positive results from performance reviews and employee evaluations usually result in a merit increase, which is based on an employee's level of performance. Employees who receive outstanding reviews typically are rewarded with greater salary increases. Employees who show minimal progress may still receive a salary increase, although a less generous one. In many organizations, the precise amount by which an employee's salary can be increased is unknown, although supervisor and manager latitude could cap the increase or provide a ceiling amount for employee salary increases.
  
  

Workforce Planning

• Workforce and succession planning is also a basis for salary increases. Employees who are on a career track within the organization often receive regular pay increases that reflect a higher-level position and added responsibilities that come with promotion. Workforce planning can affect the salary levels as well. If your organization initially believed that a large number of employees was needed to maintain production standards and later discovered that fewer employees could accomplish the organization's goals, the company might consider making salary increases because fewer workers are needed. In addition, a job analysis may be recommended before making changes to salaries. Job analyses determine the job's value relative to its contributions to an organization's overall business goals. The more valuable a position is to the company's performance, the more likely it is for the employees in those positions to receive salary increases.
  
  

Recruitment and Retention

• Employers must maintain their competitive position in the labor market to attract and retain talented workers. Without a competitive compensation structure, your organization might have to settle for employees who are mediocre professionals instead of the best and brightest in their field. This isn't to say that salaries are a determining factor in an applicant's decision to seek employment or an employee's decision to look for employment elsewhere. Nevertheless, compensation plays an important role in recruitment and retention. Salary.com research indicates that more than half of workers looking for another job do so because they feel their current job's salary doesn't adequately compensate them for their expertise. Therefore, another reason to increase an employee's salary is for retention purposes. While this might appear to be a questionable solution to retaining employees, salary increases and retention bonuses are common in many industries and for certain professions such as registered nursing and information technology.