What to Do When You Cannot Afford to Give Raises This Year
Business conditions have made raises impossible or impractical this year. This is a real situation that small businesses face, and one where the way you communicate matters as much as the decision itself. Handled well, this conversation preserves trust. Handled poorly, it starts an exodus.
Be Direct and Honest Early
Do not let this be a surprise at review time. If raises are not happening this year, communicate that as early as you know it, not at the moment you would normally be handing out increases. Employees who find out at their annual review that the conversation they prepared for is not happening feel blindsided and manipulated, even if that was not your intent.
Explain the Actual Reason
Employees are smarter about business conditions than most managers give them credit for. A vague 'this was a difficult year for the business' without any specifics reads as evasion. A specific explanation like 'revenue was down 18% from last year and we are managing cash flow carefully' or 'we had an unexpected capital expense that affected what we had available for compensation' is honest and respectful.
You do not need to share every financial detail. You do need to give employees enough information to understand that the decision is real and business-driven, not a choice made at the expense of their interests.
What Not to Say
Do not say 'nobody is getting raises' if some people are. Employees talk, and discovering that was untrue destroys trust.
Do not promise raises next year unless you are confident you can deliver. A broken promise about future compensation is worse than the original no.
Do not minimize the impact. 'It is just one year' dismisses something that matters to your employees.
Do not blame it on factors outside your control if the reality is more complex. Employees can tell the difference between honest constraint and a convenient excuse.
Acknowledge What Employees Are Experiencing
Inflation is real. Your employees are aware that flat compensation in an inflationary environment is effectively a pay cut. Acknowledge this directly rather than pretending the timing is neutral. 'I know this is particularly difficult given what inflation has done to purchasing power this year. I do not want to minimize that.'
Offer What You Can
If raises are not possible, consider what else is within your ability to offer: additional flexibility, a one-time bonus if and when conditions improve, additional PTO, professional development, or a clear commitment to revisit compensation at a specific future date. These are not substitutes for compensation (do not present them as equivalent) but they signal that you are thinking about your employees' interests even when the answer to raises is no.
Have the Conversation Individually, Not in a Group
Tell each employee individually, not in an all-hands meeting. Each person's situation is different: their tenure, their current compensation relative to market, their personal financial situation, and they deserve a private conversation where they can respond honestly.
Our handbook includes a compensation and pay practices section that sets expectations for how and when compensation decisions are made, reducing the surprise and frustration when conditions require difficult decisions.
Editable Word document + PDF. Instant download. Created by a SHRM-SCP certified HR professional.
Questions about this or other HR topics? Visit pragmatichrgroup.com for more resources.
