Let's clear the air right at the start. Dangling the carrot just doesn't work. If you make promises or imply that a raise is forthcoming after a certain period of time or after certain performance goals are met, you have to come through. However, it isn't really money that motivates most employees as long as the compensation is fair. Don't get me wrong, everyone wants to make as much money as they can, but money isn't the only thing that matters. They just don't want to feel like you're taking advantage of them. Earlier this morning I came across an article published a couple of days ago by Kim Keating, Founder and Managing director of Keating Advisors, What Your Manager Fears Most When You Ask for a Raise. "If you're waiting for your boss to tell you 'good job' and offer you a much-deserved raise, chances are it isn't going to happen," she says. "Why not?" is my response. We'll talk about that later, but here are the three things she argues you're most afraid of: \tAm I going to lose this person? It's possible there are some employees you might not really miss if they left, but chances are most of your employees make valuable contributions that you'd hate to see walk out the door. Keating's advice to your employees is to make sure they perform at a high level, capture and record their accomplishments, and are prepared to talk about them when they ask for the raise. I'm not sure I agree with the idea that everyone deserves a cost-of-living raise every year, but I totally believe that exceptional performance should be rewarded with a raise, and we should get together to talk about that with our employees at least every year. What's more, exceptional employees shouldn't have to ask for a raise. If you force them to, they'll eventually get it someplace else and you will lose the person. \tDo I have enough money in my budget for a raise? As a small business owner, I've been in the position where a very deserving employee asked for a raise because someone else had reached out to him and offered him one. We were pretty much running on a shoestring and there was no way I could match the offer he had just received. He was a key employee and it would have really hurt my business to lose him. I could give him a little bump, a token when compared to his other offer, but the work environment and what we were doing (combined with what he knew was a sacrifice I was willing to make for him) was enough to keep him. In larger companies, when "budgets" are used as an excuse—and it's an obvious excuse, you will run the risk of losing good people. \tIf I give one person a raise, will it create an impression that all employees are underpaid? Keating suggests to your employees, "...your primary concern should be getting market value for your job. If you are being underpaid compared to others doing similar work or you could get a higher salary elsewhere, you have a valid argument for requesting an increase." If your goal is to get the best people you can for the least amount of compensation you can get away with, you might be in trouble here. Daniel Pink argues (and I agree) you don't need to pay more than everyone else, you just need to pay for each job role enough to make compensation a non-issue. In other words, you need to be fair. Additionally, most employees understand that talking to others about their compensation is taboo. I don't know what my colleagues make, when they get a raise, or the details of their bonus. Neither do they know mine. I do know the compensation structure for my team and know that we're always looking for ways to make working at Lendio more attractive to the team, and some of that does involve compensation. I've worked and managed organizations that didn't want formalized review cycles because they didn't want to address the issue of compensation every year. I admit, I didn't have a scheduled annual review in any of the small business I was responsible for, but I did make it a point to talk to my employees every year and it usually amounted to a bump in pay of some kind—even if it was a modest bump. I've also worked in businesses that had formalized reviews, companies where promises were made and broken, companies that kept every promise they ever made to me, and others where excuses abounded. I've always appreciated those who never forced me to initiate the conversation hat in hand—which is why I always treated my employees the way I did. What are you afraid of? How do you address employee compensation? What do you do when an employee asks for a raise?