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Pay Raises in the US: Calculation and Compliance Guide

7 min read

Pay raises are an essential aspect of employee compensation and can impact job satisfaction, motivation, and retention. However, navigating pay raises can be complex, especially in the US with its legal landscape, different types of pay raises, and various factors that influence pay raise decisions.

This blog post will be your pay raise guide. We will explore everything employers need to know about pay raises in the US, from the legal requirements to the types of pay raises and factors that impact pay raise decisions. We will be exploring what constitutes a good raise, how to calculate a pay raise, and what laws and regulations must be taken into consideration when giving an employee a raise.

By the end of this post, you’ll have a better understanding of how to approach pay raises in your company and ensure fair and equitable compensation practices.

What is a good pay raise in the US?

Determining what constitutes a “good” pay raise can be subjective and dependent on various factors such as industry, geographic location, and company size. However, a good pay raise in the US should generally be one that is fair, competitive, and reflects the employee’s contributions and value to the organization.

In terms of numbers, a good pay raise typically falls between 2-5% for most industries. However, for high-performing employees, it’s not uncommon for pay raises to be in the range of 7-10%.

It’s important to note that a good pay raise should not be a one-time event. Rather, it should be part of a consistent and fair compensation structure that aligns with the company’s values and goals. This may include regular pay raises tied to performance evaluations or cost-of-living adjustments.

Ultimately, a good pay raise is one that demonstrates the employer’s commitment to their employees and their overall success. By providing fair and competitive compensation, employers can attract and retain top talent, boost employee morale, and drive organizational success.

How to calculate a pay raise?

Calculating an employee pay raise can seem like a daunting task, but it’s important to ensure that the increase is fair and in line with company policies. Here are some steps to help you calculate a pay raise:

  • Determine the current salary: The first step is to determine the employee’s current salary. This can be done by looking at their employment contract or recent pay stubs.
  • Decide on the raise amount: The next step is to decide on the amount of the raise. This can be based on factors such as performance, industry standards, and budget constraints.
  • Calculate the percentage increase: Once the raise amount has been determined, calculate the percentage increase. This can be done by dividing the raise amount by the current salary and multiplying by 100.
  • Determine the new salary: The final step is to determine the new salary by adding the raise amount to the current salary. Double check your calculations to make sure the new salary is accurate.

It’s important to keep in mind any legal requirements and company policies that may affect the pay raise calculation. By following these steps, employers can ensure that pay raises are fair and consistent with their compensation strategy.

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How do pay raises work in the US?

There are several different types of pay raises that employers may use to reward their employees. Here are some of the most common types of pay raises:

  • Cost-of-Living Adjustments (COLAs): These pay raises are tied to inflation rates. They are designed to help employees keep up with rising costs of living. COLAs are typically calculated based on the Consumer Price Index (CPI) or regional cost-of-living data.
  • Seniority-Based Pay Raises: These pay raises are based on an employee’s length of service with a company. For example, an employee may receive a pay raise each year on their work anniversary.
  • Performance-Based Pay Raises: These pay raises are based on an employee’s individual performance, such as meeting or exceeding goals or demonstrating exceptional skills. These pay raises may be tied to performance reviews or other forms of evaluation.
  • Promotion-Based Pay Raises: When an employee is promoted to a higher position within the company, they may receive a pay raise as part of the promotion.
  • Market-Based Pay Raises: Employers may offer pay raises to keep up with the market and remain competitive in attracting and retaining talent. This type of pay raise may be based on industry benchmarks or surveys of salaries for similar positions.

Laws and regulations to consider when discussing pay raises

Minimum Wage Laws

The legal landscape surrounding pay raises in the US is complex and multifaceted. One of the most important legal requirements that employers must consider is compliance with minimum wage laws. The federal minimum wage is currently $7.25 per hour, although many states and cities have higher minimum wage requirements. Employers must ensure that all employees are paid at least the minimum wage for the work they perform, regardless of whether they are full-time or part-time workers.

Anti-Discrimination Laws

Another key legal consideration is compliance with anti-discrimination laws. Federal laws such as Title VII of the Civil Rights Act, the Age Discrimination in Employment Act, and the Americans with Disabilities Act prohibit employers from discriminating against employees on the basis of certain protected characteristics, such as race, gender, age, and disability. This means that pay raise decisions must be made without regard to these characteristics. Employers must ensure that pay practices do not result in pay disparities based on these characteristics.

State and Local Laws

In addition to these overarching legal requirements, employers must also navigate a variety of state and local laws. These also impact pay raise decisions. For example, some states have pay equity laws that require employers to pay men and women the same wages for performing the same job, while others have laws that prohibit employers from asking job applicants about their salary history.


To ensure compliance with these legal requirements, employers should develop and maintain clear pay raise policies that are consistently applied across the organization. Employers must conduct regular audits of their pay practices to identify any potential disparities and take corrective action as needed. It’s important to consult with legal counsel or HR professionals with expertise in this area to ensure compliance with all applicable laws and regulations.

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Federal laws and regulations affecting pay raises in the US

When it comes to implementing pay raises, HR professionals must navigate the complex landscape of federal laws and regulations that govern compensation practices in the United States. Understanding these laws is crucial to ensure compliance and avoid legal issues. Let’s take a closer look at some key federal laws and regulations that impact pay raises:

Fair Labor Standards Act (FLSA):

The Fair Labor Standards Act establishes the federal minimum wage and sets guidelines for overtime pay. It requires employers to pay non-exempt employees at least the federal minimum wage for all hours worked and provides regulations for overtime compensation. HR professionals must ensure that pay raises comply with the FLSA’s minimum wage requirements and determine whether employees are eligible for overtime pay based on their job classifications.

Equal Pay Act (EPA):

The Equal Pay Act prohibits wage discrimination based on gender. It requires that men and women be paid equally for performing substantially similar work, including pay raises and promotions. HR professionals should regularly review pay practices and conduct pay equity analyses to identify and rectify any disparities in compensation based on gender.

Title VII of the Civil Rights Act of 1964:

Title VII prohibits employment discrimination based on race, color, religion, sex, or national origin. While it does not specifically address pay raises, HR professionals must ensure that pay raise decisions are made without any discriminatory biases. Consistency, objectivity, and transparency in the pay raise process are crucial to comply with Title VII.

Age Discrimination in Employment Act (ADEA):

The ADEA prohibits age discrimination against employees who are 40 years of age or older. HR professionals must ensure that pay raise decisions are based on merit and not influenced by an employee’s age. Implementing clear performance evaluation systems and maintaining documentation of performance criteria and pay raise decisions can help demonstrate compliance with the ADEA.

National Labor Relations Act (NLRA):

The NLRA protects employees’ rights to engage in collective bargaining and prohibits unfair labor practices by employers. HR professionals should ensure that pay raise decisions do not interfere with employees’ rights to engage in protected concerted activities or discriminate against employees involved in union activities.

State and Local Laws:

In addition to federal laws, HR professionals must be keep in mind the state and local laws that govern pay raises. Some states and local jurisdictions have their own minimum wage laws, pay equity legislation, and additional protections for employees. It is crucial to understand and comply with these specific laws when implementing pay raises.

HR professionals should stay updated on changes to federal, state, and local laws regarding pay raises. Regularly reviewing and adjusting pay raise policies and practices to align with legal requirements is essential. Seeking legal counsel or consulting with labor law experts can provide further guidance and ensure compliance with applicable laws.

By understanding and adhering to federal laws and regulations that affect pay raises, HR professionals can protect their organizations from legal risks, maintain fair compensation practices, and promote a positive and inclusive work environment.

For more information check out our article on 2023 compliance deadlines.

Why you need to learn about pay raises

In conclusion, pay raises are an important tool for attracting, retaining, and motivating employees in the US. However, employers need to be mindful of the various factors that can influence pay raise decisions and strive to create fair and transparent pay raise policies that align with their business goals and values. By benchmarking their pay practices, communicating effectively with employees, and navigating the legal landscape of pay raises, employers can make informed and equitable pay raise decisions that benefit both the organization and its employees.

To take the next steps, we encourage employers to:

  • Conduct a pay equity audit to identify any disparities and ensure compliance with anti-discrimination laws.
  • Develop a transparent and consistent pay raise policy that takes into account performance, seniority, and other relevant factors.
  • Benchmark their pay practices against industry norms and adjust them as needed to remain competitive.
  • Communicate pay raise policies effectively to employees and provide opportunities for feedback and discussion.
  • Stay informed about changes to minimum wage laws and other legal requirements related to pay raises.

By following these steps, employers can create a positive and productive work environment that fosters employee engagement, satisfaction, and retention. Factorial HR Software will help you manage your employee pay raises.

Did you like this article? Benjamin McBrayer has been a Content Writer for 5 years. He specializes in HR strategy and workplace trends. Check out Factorial's blog for more of his posts on time management in the office, productivity, and HR news.

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