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A good employee asked me for a pay rise, but I can’t afford it.

A good employee asked me for a pay rise, but I can’t afford it.

If you can’t afford to give a good employee a raise, you’re in a dangerous situation – and dealing with it in the wrong way can make things even worse. Matt Buckland, VP of Customer Advocacy at Workable, and formerly of Facebook, Bloomberg and Lyst, explains how to get through it.

If you’re running a small business, soon enough, someone in your team will ask you for a raise.

Dealing with raise requests is generally about answering the question of “does this employee deserve a raise”. But at small businesses, there’s often an additional question to be asked, which complicates things a lot:

Can the business afford to give out this raise?

If the answer to this question is a resounding “no”, but the answer to “does this employee deserve a raise” is “yes”, you’re in trouble.

This is a nasty situation. While they’re probably not going to walk out on the spot if you don’t give them a raise, it will steadily erode their morale, most likely ending with them leaving your business. And unfortunately, since they’ve directly identified money as a problem, alternative ways of rewarding them (such as more learning opportunities, different perks, and so on) are unlikely to act as anything other than a temporary solution.

You need to fix this problem. Here’s how.

The bad way, the really bad way, and the good way

There are a few ways to deal with this problem.

The bad way: give them a meaningless title

This is an enticing trap which small businesses have a nasty habit of falling into. You add a completely irrelevant layer to the structure of your organisation (like a “senior lead” in a team of four people), talk about some meaningless changes in responsibility, and sheepishly tell them that they’ll get a raise… at some point.

This might stop the employee from leaving. It will cause much bigger problems down the line. It will make it harder to hire people (where does your new Head of Sales fit in if you already have a Senior Lead Sales Director?). It will make your salary and benefits system a nightmare. And when, eventually, everyone realises that these inflated titles don’t really carry any higher salaries or real responsibilities – and that “progression” in your business is basically a myth – people will start to look for other businesses which can offer them real progression.

If you're interested in learning more about this progression in small businesses, check out this post on how to promote someone in a startup.

The really bad way: pretend they don’t deserve a raise.

I’m not going to spend much time explaining why this is a terrible idea. Remember two things:

  1. Most people have a pretty decent sense of whether they’re being under or over-valued
  2. You’re probably not as good a liar as you think you are

Your employee is, most likely, going to know that you’re not being honest with them. Worse still, you’re lying to deny them a raise, and misrepresenting the amount of work they’re doing.

You’re going to lose any goodwill this employee feels towards you, and they’re going to immediately feel that the extra work they were putting in was utterly pointless. You’re at risk of angering, demotivating and (most probably) losing a high-performing, valuable employee. Don’t do this.

The good way: make a plan

Talk to the employee, and be as open as possible about your financial situation. Acknowledge that they deserve a raise, and that you want to give them one, and work with them to create a plan, detailing what the business needs to do to be able to give them a raise.

Don’t let this plan be vague. It should have specific numbers and specific timescales in it - e.g. “If we hit X revenue target by Y date, we will be able to offer you a Z% raise”.

If the targets are within the employee’s area of responsibility, it might be worthwhile talking about how their contribution could help push the business towards reaching them – but remember that this is fundamentally a commitment the business is making. They’ve excelled at their job, and deserve better: it’s time for the business to start measuring up to that.

This plan should also contain a solid description of what happens if the business doesn’t hit the targets lined out – most likely an acceptance that they will be looking to move on from the company and, if possible, flexible notice period terms.

Ideally, this plan should be written down, with both you and the employee keeping a copy for their records. In many ways, this is a way of keeping the business honest: it’s all too easy to make vague promises and find limp excuses for not following through on them. A clear, written document with specific numbers is better for everyone involved: the employee will appreciate the commitment, and, if you do hit your targets, will be able to have a frank, above-board conversation with you about the promised raise.

Here’s an example of what this plan might look like:

We recognise that you deserve a raise. Unfortunately, the financial situation that the business is currently in means that is not possible to do this.

This plan aims to clarify what conditions the business must meet to be able to offer you an increase in salary, and what period of time we feel is a realistic expectation for meeting these conditions.

If we hit [target], we will be able to offer you a raise of [percentage]

Some examples of possible targets:

  • An increase in sales
  • An increase in revenue
  • An increase in profitability
  • A reduction in costs
  • Completion of a project which is currently causing costs
  • Securing a funding round at or above a certain value
  • A growth in user numbers

Once we reach this target, we are committed to increasing your salary by the aforementioned amount.

Reasonably, we are expecting to hit this target within [specific period of time].

If we are not able to hit the target(s) that we have outlined, or only partially hit them, then we will discuss other options – such as providing you with a smaller raise which the business can afford, or extending the timelines for the targets. At this point, we would understand if you chose to leave the company, and we will be happy to write you a reference and provide a flexible notice period arrangement.

If you don’t hit the targets, then you should be prepared to lose the employee. There’s actually a good chance they’ll stay on: this whole exercise should be an effective way of building trust between you and them.

But if they don’t want to stay on – that’s ok! It’s normal for people to join and leave businesses. Small companies often look to foster a “family” atmosphere – and while this can be nice, it’s not particularly helpful when someone wants to leave. Remember that this isn’t really a personal judgement: they’re making a decision about their career. Treat it respectfully – and try to avoid feeling hurt or offended.

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