Over the past few years, almost every developed economy has seen unemployment rates tumble to near-historic lows, and that’s creating no shortage of challenges for businesses trying to attract and retain the talent they need to thrive. For that reason, there has been plenty of discussion surrounding the recruitment part of that equation, and just as much around retention strategies to stop talent loss.

While those big-picture concepts are a necessary facet of today’s labor environment, though, they do little to address the very personal and very specific things that business owners and managers have to do to keep their employees happy and working productively. For example, what do you do when an employee requests a raise? How do you decide if it’s worth giving it to them rather than risk losing them to another company? These are exactly the kinds of situations that business owners have to deal with daily. To help, here’s an overview of how to handle such a situation – from what questions to ask to how to judge the employee’s value relative to the cost of replacing them.

Listen Carefully to the Request

The hardest part of dealing with an employee that requests a raise isn’t making a decision about the merits of that request. It’s actually in listening to the request itself without making any snap judgments. The reason this is so is that salary requests don’t often come at opportune times, like when new budgets are being drafted or at the perfect time in the revenue cycle. Those factors tend to bias the decisionmaker against giving anyone a raise – deserved or not. That’s why the first thing to focus on when an employee requests a raise is allowing them to relate in complete terms what it is they want and why they’re asking for it. The dialogue will contain valuable hints that will inform a reasoned decision later. For example, if the employee came prepared and is making a well-researched and data-supported case for themselves, that tells you that they know what their options are, and could be making the request as an effort to stay with the company rather than seek other opportunities elsewhere.

Respond in a Transparent Manner

Another important thing to do when an employee requests a raise is to make sure to be as transparent as possible about the situation. The reality of running a business means that it won’t always be possible to grant such a request, even if it is warranted. It’s vital to be clear about the reality of the situation when discussing things with the employee, and they’ll appreciate the candor. For example, if there’s a performance review process in place that determines compensation, let the employee know in clear terms when they’re due for a review. If possible, arrange to complete the process for them in expedited fashion as a sign of good faith. Throughout the discussion, pay attention to how the employee reacts to what you’re saying, both verbally and through any relevant non-verbal cues. If they seem willing to wait, make sure to follow up with them at the appropriate time. If they’re showing signs of displeasure or dissatisfaction, make sure to start working on a backup plan should they decide to depart the company.

Evaluate the Request

To make a sound decision, the next step in the process is to conduct a thorough evaluation of the request. That evaluation should answer these important questions:

  • Is the employee performing at or above average in their position?
  • How integral to the operation are they?
  • Are there others in the organization with overlapping skills?
  • Is their request reasonable and commensurate with their position?
  • Are there others in the organization that will use this employee as a comparable example in future negotiations?
  • How competitive is the labor market for their skill set?
  • Can the business justify the additional labor cost?

If the evaluation answers these questions and paints a picture of a high-performing employee in a hard-to-replace position, there’s a good chance that it makes business sense to accede to their request. Of course, if the employee in question is one of many similarly-skilled members of the organization, consider the fact that granting the request might lead others to expect the same response when or if they decide to request a raise. Although it’s undesirable to risk losing an employee to maintain the status quo within the group, sometimes that is the best course of action to take.

Consider A Counter-Offer

In situations where an employee’s request is reasonable but is still not one the business can justify, consider making a counter-offer while explaining the reasons that the initial request can’t be fulfilled. If possible, consider designing a progressive compensation package that slowly steps the employee up to their desired salary range over time, tied to specific performance metrics.

Many employees will gladly accept such an arrangement, since it offers them some certainty and a measure of control in the outcome, as opposed to moving to a different company where they will be an unknown quantity with few guarantees of longevity. Depending on the level of employee, it may also be worthwhile to offer them additional non-monetary compensation to bridge the gap between their request and the business’s offer. Such arrangements are common in executive-level retention and compensation packages and can go a long way when properly applied, and some of today’s more popular benefits options can be quite cost-effective.

Get to a Win-Win

If all goes well, it should be possible to arrive at a mutually-agreeable response to the employee’s compensation request. In many cases, even the negotiation process itself will help to impress upon the employee that they are a valuable member of the team and that the company is doing its’ utmost to provide fair compensation for their contributions to it. Be aware, of course, that some employees will make salary requests in response to an offer they already have in hand from another company.

When that happens, there’s little chance they will settle for anything less than the full sum they’ve asked for, so it’s always worthwhile to explore replacement options as a fallback position. Even if it’s rendered moot when the employee decides to accept the tabled offer, there’s no excuse for getting caught flat-footed in such a tight and competitive hiring environment. The good news is that handling employee raise requests in the manner prescribed here results, more often than not, in an equitable solution both parties can live with – and that should always be the end goal that both sides are hoping to achieve.