How to Calculate Salary Increase for Fair Pay [+ Formula]

Know What Kind of Raise They’re Asking For

Every raise tells a story – about why you value an employee, what your company can afford, and how you structure pay overall. When you adjust them or approve one, you’re sending a message about priorities, recognition, and fairness. That’s why it’s important to be be super clear on which type is on the table.

Here are the most common types:

Cost-Of-Living Raise

This type of raise is usually built into yearly salary increases but awarding it is at your discretion. You use this type of raise to keep up with inflation and maintain employees’ purchasing power. It doesn’t reward performance in any way, but make sure that pay doesn’t lose value over time.

For example, if inflation runs at 4%, you’d raise a $60,000 salary to $62,400 to maintain purchasing power. Even though these raises may feel routine, they matter because employees quickly notice when their bills outpace their income.

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Performance-Based Raise

Also known as a merit increase, a performance-based raise is a great way to reward your team members for exceeding expectations. It can be awarded at any point, but is often considered and approved during a quarterly or annual performance review.

Let’s say you offer a 7% performance raise on a $70,000 salary. That will bring the total salary to $74,900 annually. These raises reinforce a culture where results directly affect compensation.

Promotional Raise

When an employee steps into a new role with higher responsibility, it’s important that their pay reflects the new expectations that come with the job. You might promote a Project Manager in your team to a Senior Project Manger which depending on your industry might come with a 10-15% increase.

Without this adjustment, a promotion risks feeling hollow and possibly even performative. You won’t hang onto talent in the long-term if you give them a bigger workload without some sort of incentive or recognition to go along with it.

Market Adjustment Raise

Labor markets shift, and sometimes your pay bands don’t keep up. If salary benchmarking data shows your salaries fall behind industry averages, you need to bring employee salaries back in line with competitors.

Without this raise, you’ll likely struggle to recruit and retain people in high-demand roles. For example, if engineers in your region now earn $95,000 and your team is still at $85,000, you’ll need to adjust.

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Back Every Raise With Data

Don’t guess whether a cost-of-living adjustment or performance bump is enough. Our free Salary Benchmarking Tool shows you what the market pays in real time, so you can approve raises that are fair, competitive, and backed by evidence.

Benchmark Salaries

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Equity Or Fairness Adjustment Raise

Over time, pay imbalances can creep in across teams or individuals. Two employees in the same or similar roles might end up being paid differently because they had different starting offers or raises being offered at different times in their careers.  

You use an equity or fairness adjustment raise to correct this type of discrepancy and align salaries fairly across the team. Doing this proactively helps prevent resentment and potential legal risks if pay inequities remain unchecked.

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It’s not all about salary. Are you offering a fair compensation package?

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How to Calculate a Salary Increase: Step-by-Step

You don’t need to overcomplicate the process, but you do need a clear, repeatable approach that’ll keep salary increases standardized. Here’s how to calculate raises fairly and accurately.

Step 1: Gather Data

Every good plan starts with collecting and collating all of the data you need. Start by finding and recording each team member’s current salary along with reliable benchmarking data for similar roles.

• Decide whether you’ll calculate the raise as a percentage of the current salary or by targeting a new total salary.
• This ensures your approach is grounded in market standards and not based on random, spur of the moment adjustments.

Step 2: Define the Raise Type

When awarding a raise, it’s important to be clear about the reason behind it. Transparency will help build consistency, fairness, and trust with your team.

• Specify what kind of raise you’re giving: performance-based, market adjustment, promotion, or across-the-board.
• Being clear about the reason helps maintain consistency and fairness across your team and ensures the raise ties back to your company’s compensation strategy.

Step 3: Apply the Percentage Increase Formula

Having a reliable, reusable method of calculating salary increases will help you stay consistent. Use the formula: Raise Amount = Current Salary × Raise Percentage.

• This standardizes the calculation and makes it easier to apply across multiple employees.

• A percentage-based method also makes the raise proportional to each employee’s current pay level.

Step 4: Calculate the New Salary

Once you know the raise amount, add it to the employee’s current salary to find the new total.

• Present both the percentage increase and the new salary figure so that your employee understands the change.
• Framing it both ways helps highlight the raise’s impact.

Step 5: Account for Taxes and Benefits

Raises are calculated on gross pay, but employees often think in terms of take-home pay. Remind your team that the raise reflects gross pay, not take-home pay.

• Taxes, benefit contributions, and deductions will reduce the actual increase seen in their paycheck.
• Setting expectations upfront will prevent confusion or disappointment.

Step 6: Double-Check Your Math

Accuracy is non-negotiable when it comes to pay. Always confirm your calculations using payroll software or a reliable raise calculator.

• Small mistakes can undermine trust and create payroll issues that are difficult to fix later.
• Taking the time to verify your calculations shows that you’re taking the whole thing seriously which in turn will build confidence in the process.

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What Factors Impact Pay Raises?

Even when you run the numbers perfectly, deciding what’s fair is the more difficult part, partially because pay increases are influenced by different human, legal, and financial factors.

Plus, there’s the fact that it’s probably one of the most sensitive and impactful decisions you’ll make in the year for your business. It affects employee satisfaction, retention, and ultimately your company’s bottom line. With that in mind, let’s take a look at what factors can impact pay raises:

• Taxes and Benefits: A raise increases an employee’s gross salary, but their take-home pay won’t rise by the same amount. Taxes, retirement contributions, and benefit deductions all cut into the increase, and sometimes raises can push employees into a higher tax bracket. Clear communication helps employees understand the real impact on their paycheck.
• Performance Metrics: When raises are tied to performance reviews, the process only works if it’s transparent. Employees need clear, measurable criteria to know what drives higher pay. Without consistency, it raises the risk of feeling random and damaging trust.
• Legal Requirements: Minimum wage laws, mandated average yearly raise and collective bargaining agreements can set the baseline for raises. These legal guardrails protect employees while ensuring compliance for employers. Staying informed prevents costly penalties and reinforces fairness.
• Budgeting Across a Team: A raise that seems fair for one employee may become unsustainable if ten employees expect the same. You’ll have to balance individual recognition with team-wide equity. Poor planning can quickly strain budgets or create unintentional pay gaps.
• Company Sustainability: Raises must align with long-term financial health, not just immediate budgets. Even generous raises can backfire if they’re unsustainable across the workforce. Leaders should ask: “Can we maintain this model without risking profitability or stability?”

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Want to see how your pay strategy stacks up?

Competitive raises start with knowing the market. Have a look at our state average salary guides for everything you need to benchmark fair pay in the U.S., stay compliant, and make informed decisions that attract and retain top talent.

Learn More

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Alternatives to Salary Raises

If the budget just isn’t there or you’re a startup or small business looking to attract top talent without the high salaries that enterprises can offer, you still have options. There are plenty of meaningful ways to compensate your team that give them the recognition, motivation, and retention value they need without drastically increasing payroll costs.

The table below breaks down common alternatives, how they add value to your business, and what they would look like in reality.

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Key Takeaways: Benchmarking Salaries With Playroll

Try to see calculating salary increases as more than just running the numbers to keep up with the market. It’s an opportunity to build trust in your team, show recognition, and ensure your pay practices are consistent and fair.

By gathering the right data, choosing the appropriate raise type, applying clear formulas, and accounting for both financial and human factors, you can make confident decisions that benefit both your employees and your business. The goal is always the same: create a compensation strategy that feels fair, competitive, and sustainable.

If you need a helping hand or would like to simplify the whole process, book a demo with our team and we’ll have you building and scaling fair, accurate, and compliant compensation packages in no time.