The economy is improving. Unemployment is down. So, the question comes up, "Should we be thinking about raises?" The answer is, of course, yes, we should be. We should always be thinking about employee compensation. Here are a few things to help you decide whether now is the time to reward your employees' hard work with a bump in pay.

You should give your employees a raise when:

The market rates for the jobs they have change. The reality is, having an overpaid staff is almost as bad as having an underpaid staff. Sounds funny, but the thing is, an overpaid staff will be bound to you in golden handcuffs. You don't want to lower your turnover to zero unless everyone currently on board is absolutely perfect. They aren't. You want to be at market rate, or slightly above.

As the economy improves, chances are the market rates for some positions will increase as well. Keep your eye on companies with similar jobs and make sure your people are making current rates.

Your new hires are coming in at higher salaries than what your long termers make. Smart job candidates tend to negotiate their new salaries. When your candidates are consistently requiring higher salaries to give up their old jobs and come work for you, you need to give your current staff increases as well. It's demoralizing when they guy who has been here two weeks makes more than the guy who has been dedicated to the company for 10 years.

Your turnover is starting to increase. The number-one reason people leave a job is not money related--people leave managers, not paychecks. But money is a reality that we all have to deal with and, sometimes, even with a fabulous boss, the headhunter can be quite convincing. And when your employees find out that they can make more money elsewhere, they believe you don't value them. When they believe you don't value them, your relationship starts to deteriorate.

Performance increases. In a lot of small startup environments, there's not a clear path to the top. There aren't six levels between the marketing assistant and the chief marketing officer--in fact, those two may be the entire marketing department. But, as that assistant increases her abilities and takes on more responsibility, it's important to increase her salary and her title to match what she is currently doing.

This is an important aspect of looking at market rates as well. Remember, it's not the actual job title that should determine salary, but responsibilities and achievements.

You should not give your employees a raise when:

You want to nudge someone out. If your staff is not performing up to speed and you'd prefer to see them move out on their own accord, not giving raises as the economy increases is a sign that they should move on. As your employees learn they can make more money elsewhere, they'll start leaving.

You absolutely cannot afford to increase payroll costs. No matter how good the economy is, if your business isn't doing well, there may be no money to give even small raises. In this type of situation, you'll need to make it worthwhile for your employees to stick around. In this situation, explain to them why they aren't receiving increases and consider the following:

  • Offer stock, both grants and options. This way your employees profit when the company turns a profit.
  • Increase your perks. Allowing people the flexibility to go to their child's parent-teacher conference without using vacation time costs you practically nothing, but it does increase their loyalty to you. Looking for occasions to say yes rather than no makes you an appreciated boss.
  • Increase opportunity. If you make it clear that you're on the financial edge but that you're going to give people the opportunity to take on new projects to learn new skills that will benefit them later, some people will see this as a perk.
  • Hire below what you need and train. If you want to hire the perfect person, you'll have to pay for that. If, instead, you hire someone who needs some time to get up to speed, you'll save money and give this person a growth opportunity.

Regardless of what is best for your company, remember to always be thinking about what is best for your employees.