Employee raises: how to reward your hourly employees

Okay: raise your hand if you like raises. Now, raise your hand if you’re a business owner who completely understands employee raises… that’s what we thought.

Like most business owners, you might like the idea of employee raises, but everything else surrounding the monetary reward might be a little confusing.

When do you give them? Why do you give them? Is it mandatory? How much of a raise should you be giving to your employees?

Not to worry. We’ve got a  quick lesson for all small business owners and managers on everything related to employee raises. Let’s get started. 

How to determine raises for hourly employees

Raises come in all shapes and sizes, and for a number of reasons. Depending on the type of business you run, you might give a raise based on sales or during an annual performance review. Or, maybe you’re just doing it because  everyone else in the industry is doing it. 

There are lots of reasons why you might give employee raises: here are just a few:

To reward performance

Employees who are on time, respectful, show up for their shifts, or go above and beyond their job expectations can—and should—be rewarded with raises from their employers.

For hourly workers, you can track exemplary job performance to determine if they qualify for a raise. Look at benchmarking against measured goals that have been set and communicated, or achievements made over a set amount of time. Businesses can track performance using apps like Homebase, and monitor progress over time.

To keep up with the increasing cost of living

In the United States, the cost of living isn’t always, well, livable. For example, the federal minimum wage—which is meant to be a living wage—for nonexempt employees in the United States is just $7.25. According to this article, “the hourly rate hasn’t kept up with the cost of living since the late 1960s.” This means that the amount of money that a minimum-wage worker with a family of four will bring home falls below the poverty line. 

To counter this problem, businesses may offer raises to employees that provide more security and keep up with the cost of inflation. 

As a retention strategy

Giving your employees raises is a very effective retention strategy. Industries that employ shift workers come with a lot of turnover. In fact, according to a recent study by Homebase, more than a third of small business owners list “retaining current employees” as a top concern. By giving employee raises, workers are less tempted to find a higher salary elsewhere. 

To keep your employees motivated

Those who are paid better, perform better… right? Some might think so. And it’s this philosophy that keeps a number of business owners offering employee raises to help keep their employees motivated. Picture it like a carrot dangling in front of a horse. But in this case, the carrot is a raise that keeps the employee working hard and happily. (Hopefully.)

The industry calls for it

Life changes fast, and so does business—certain ones faster than others. Some industries have substantial changes that can cause things like hourly wages to jump up in order to get the talent they need. And when this happens, there’s a ripple effect.

This can set a new standard that businesses in the same industry need to follow if they want to keep up, or simply keep their talent. 

To recognize when your employees change roles

If your employees have taken on more work or have been assigned different duties than originally agreed upon, it might be time to give them a raise. When doing so, do your research and make sure the raise fits with their updated job description or their new title. 

4 types of raises

As mentioned, employee raises come in many different forms. That said, there are four common ones that we’ll cover: performance and merit increases, standardized increases, base wages, and cost-of-living. 

Merit-based increase

This type of employee raise is based on performance, but can be given at any time vs. during an annual performance review. It’s based on how employees are performing at work, and can be utilized as a way to reward your top-performing employees.

If you go back to the carrot and the horse analogy, this is it. A merit increase essentially motivates your team to up their effort in order to increase their salary.

Here’s an example: a mechanic at a bike shop has sped through repairs and tune-ups at record speed. Not to mention, they’ve covered for a few sick employees on a consistent basis. This level of commitment has not only helped the shop in stressful times, but it’s made a huge boost in sales for the shop. Plus, this mechanic even started a TikTok for the shop, showcasing the tune ups and how-to’s for the audience.

If a business owner wants to keep this employee around (and they definitely do), it’s a smart move to incentivize them to stick around. Time for a merit-based increase.

Performance-based raise

Have an employee who’s always showing up early, covering shifts, and making employees smile? You might have a performance-based raise on your hands—and hopefully, in your records.

This type of raise is based on your team member’s performance, their accomplishments, and overall contributions to your business. It’s normally recorded via reviews, notes, and check-ins, and is typically given during or shortly after a six-month or annual review.

For example: you have an employee who’s coming up on their one-year mark at your clothing shop. You check back on performance and note that they’ve excelled at customer service, and even have a few customers coming in specifically for this worker’s “fit checks”. You review the goals you’ve set out for them, what they’ve achieved, where they need work, and then determine a performance-based raise specific to their last year. 

Standardized increases

These are raises that are given across the board for your team. Every salary is increased by the same amount. This can be calculated either as a percentage or a lump sum. While it gives everyone a raise, it doesn’t single out team members or recognize high achievers or under performers.


Also known as COLA, this type of raise is a standard increase given to employees as a way to keep up with inflation and help them maintain their quality of life.

COLA could be given on an annual basis to all of your employees. It doesn’t need to come with a big hurrah, but a communication via email or communication app, like the following, would inform your workers of their change in pay:


We wanted to let you know about an important compensation update. We’re aware of the rising costs of living and understand the impact it can have on your well-being. As such, we’ve decided to implement a Cost of Living Adjustment raise for all employees to ensure that you’re fairly compensated for your contributions. 

Starting from [date], your hourly wage will be increased by [percentage]. This adjustment will be reflected in your next paycheck. 

Questions? Please reach out. We’re happy to help.

Employee raise fact: While not technically a raise, a base wage is a type of pay increase that ensures that your business is competitively paying employees for your industry, location, and the types of roles you employ. 

To implement this, you’ll find out the low-medium-and high wages for each role, then determine what percentile you want your business to be in. Your workers will be slotted into those pay bands.

Do you need to provide a cost of living annual increase?

So, you want to know: do I have to provide a cost of living annual increase? The short answer is no—but let us explain.

Officially, a cost of living annual increase isn’t mandated. That is, unless it’s required by law or is in an employee agreement. This includes annual minimum wage increases, or if it’s stated in a union agreement, benefit plan document, or employment contract.

According to the Department of Labor, in January 2021, 25 states across the country implemented increases in the minimum wage on the state level. This means that even if federal laws don’t require you to up your pay, you’ll likely be subjected to increases in your state minimum wage.

How to calculate a pay raise 

If you’ve decided to give your employees a raise, you’re in luck—calculating it is the easy part.

One of the most common ways to do so is by using a percentage of their hourly wage. Choose what percentage increase to give—typically, that’s around 3-4% per year. It depends on the industry, the employee who’s getting the raise, and why they’re getting it. To figure out the right number, go back to your records to see how well your employee has performed.

Now to the math. Here’s how to calculate a percentage-based raise:

(Current hourly wage) x (Percentage increase) = (Pay increase)

For example: ($15/hour) x (0.03) = $0.45

In this scenario, a 2% raise would equal a total hourly raise to $15.45/hour.

Managing payroll changes that come with employee raises

Still wondering about raises and your employees? There’s lots to think about. But don’t worry—Homebase can help.

If raises are a part of your business plan, you’ll need to start with tracking: which employees are getting raises, why are they getting them, and how to account for their bumps in pay. And Homebase supports all of the above.

With Homebase, you can track performance, like how many times employees have clocked in late. Or, on the flip side, see how many times they’ve clocked in early or stayed late to cover a shift for a fellow coworker. You can also store records and formal reviews all in one place: the cloud. 

Once you’ve determined who’s getting what raise, you can manage the payroll side of it with Homebase, easily and efficiently.

With the Homebase payroll app, your payroll calculations are automated. That includes the updates you make based on the raises you’re giving. So, instead of pulling out your calculator or asking AI to do the math for you, you can rely on Homebase to work it all out. That includes tracking hours worked, coordinating social security numbers, voluntary deductions, and calculating the new pay.

No more data entry, which means less room for error—and more performance reviews for your wonderful workers. What a team!

Ready to raise the bar on employee raises? Homebase makes getting there feel just as good as getting one. Get started today for free

Hourly employee raises FAQs 

What are the most common reasons to give an hourly employee a raise?

The most common reasons to give hourly employees a raise are cost-of-living increases, exemplary performance, merit, retention, motivation, or if the industry calls for it. The latter could be based on location, competition for talent, or if pay standards change and a business needs to keep up. 

What should you do when an employee asks for a raise?

If an employee asks for a raise, first listen to their request. Take in consideration their perspective, then review their performance plus the market conditions. Know what your competitors are paying, and what’s standard for your industry and the talent you’ve hired. Then, crunch the numbers.

While rewarding your hardworking employees is an important part of workplace satisfaction and retention, you’ll want to make sure that you can afford to do so. 

After you’ve done the math and have determined that you can give your employee a raise, log it. Use Homebase to update your payroll so your workers are getting paid accurately and on time. 

How do you calculate an hourly raise?

You can calculate an employee’s raise by using a percentage of their hourly wage and this calculation: (Current hourly wage) x (Percentage Increase) = (pay Increase)

A typical raise is between 3-4% each year, depending on the industry.

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