How to determine employee raises

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Winter is the time of year when many employers discuss raises with their employees. However, most employers are uncomfortable discussing pay raises, and sometimes that leads to raises turning out to be "too little, too late."

An employee can lose confidence in his current employer and make a commitment to move to another opportunity. You don’t want to lose a good employee over your hesitation about grant-ing pay raises. With today’s tight agricultural labor market, you need to make sure that your employees are compensated adequately.

Make smart decisions
Employers need to resist the urge to "hold the line on employee costs" merely because of the current economic conditions in agriculture. Your employees play an important role in your business. If they perceive that they are not being treated fairly, they may leave your operation or exit the ag labor market.

A number of the agricultural employers we serve like to award raises at the same time they perform employee evaluations. The evaluation process is a convenient time to discuss the performance of the employee and establish goals for the coming year. How well the employee met his goals for the previous year can be used as part of your determination about pay raises.

Two main theories on setting employee compensation exist. Use these two principles as a guide to help determine employee raises:

1. What would an employee earn at another farm or ranch operation?
You can get this type of information by calling a number of agricultural employers in your area. Ask specific questions about the tenure and job responsibilities of each employee. Compare notes with your fellow managers to determine what is usual and customary compensation in your area.

Some operations even have their key employees call other farming operations to obtain the compensation data. Thus, your employees understand how their compensation compares with employees of other farms and ranches.

You want to make sure that any individual working on your operation earns at least as much as he would in another comparable operation. You don't want to lose a good employee to another operation due to low wages.

2. Two reasons to give employee raises.
Two main types of raises exist: Merit raises and cost-of-living raises.

Merit raises should be given for an increase in the productivity of the employee as he or she becomes more familiar with your operation. An employee becomes more valuable to you each year during the first three to five years of employment because he learns your system of management and becomes more proficient in executing his duties. Merit raises also can be justified if an employee takes additional training or assumes a new position within your company.

Cost-of-living raises are designed to help your employees match inflation. The cost of living increased approximately 2 percent over the past 12 months. Thus, if you have an employee who has been with you for more than five years, then perhaps a 2 percent increase in compensation should be given for 2003. Cost-of-living information is available from time to time in The Wall Street Journal and other business publications.

Explain value of benefits 
When you discuss compensation with your employees, you need to consider not only cash wages, but the other benefits that you offer.

Housing, health insurance, retirement benefits, utilities and food are all standard benefits offered by agricultural employers. A number of these benefits may not be available to employees working an 8-to-5-job in town. We suggest that each year you list the value of each of these benefits and create a table to help your employee understand the full benefit of working for your farm or ranch.

Determining raises and discussing them with your employees doesn’t have to be painful. Use these ideas to help you improve your skill at determining effective compensation for your employees.

Darrell Dunteman, is an agricultural financial consultant and accountant in Bushnell, IL.

For More Information

Dunteman produces Ag Executive, a monthly ag financial newsletter. A free sample copy of Ag Executive, as well as a list of business publications, is available by calling (309) 772-2168 or writing 115 E. Twyman St., Bushnell, IL 61422.



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