One of the most common questions I get from folks outside of the HR profession is “Why is it so hard to get salary increases approved?” Particularly at larger companies, employees often see the thousands upon thousands of dollars spent on events, catering, entertainment and travel every year and then wonder why getting their 5% pay increase approved is such a big deal / why they have to haggle over an extra $_____ dollars per year when taking on a new job.
…Setting aside the role internal equity plays here, the answer I generally give is that salary dollars are typically harder to get approved because they represent a permanent obligation – e.g. a one-off payment of $6,000 dollars for international travel may be more than the $2,000 raise you’re requesting… but the $6,000 only needs to be paid once while your $2,000 raise needs to be paid every year for as long as you work at the company. And that raise also compounds on itself over time as you get future increases.
That said, there are also a number of additional (significant) costs associated with their salaries that employees don’t consider (and may not even be aware of). For instance, there are state and federal unemployment income taxes (FUTA and SUTA) that are paid strictly by the employer and based on employee salaries. You can read more about FUTA and SUTA here and here, but the FUTA rate is based on 6% of an employee’s income while the SUTA/SUI rate varies by state.
1. Learn more here if interested. The employer is also responsible for paying half of all FICA taxes 1. FICA taxes go towards social security and medicare, and are computed as 12.4% and 2.9% of an employee’s salary, respectively. Most employees will see these taxes come out of their paycheck in the form of 6.2% of their taxable income for social security and 1.45% for medicare, but the employer pays the other half.
Ergo, not factoring in the SUTA rate (which varies by state), any raise an employer gives out automatically carries with it an additional 13.7% in taxes annually on top of the compounding effects of that raise on future pay increases the employee receives while working for the firm.
I say all this not to say that companies shouldn’t give pay raises – they should. But factoring in taxes, compounding effects, and internal equity considerations… wage increases are more expensive than one might think. This make employers smart to be cautious about doling them out.
…With all that said, I reserve the right to stand corrected. As always, please share your thoughts in the comments section below.