Setting Raises and Reviews the Right Way: Stay Fair, Legal, and Motivating

As the new year kicks off, many small business owners start thinking about raises. You want to reward hard-working employees and stay competitive—but budgets are tight, and wage laws keep changing. On top of that, decisions about pay can create legal problems if they’re inconsistent, undocumented, or appear discriminatory. A thoughtful, structured review and raise process helps you stay fair, control costs, and protect your business.

Why Raises Need Structure (Especially in Small Businesses)

Small teams rely heavily on trust and clarity. When raises feel random or unclear, even good employees may feel overlooked or question how decisions are made. A structured process helps you:

• Set expectations.
• Prevent bias.
• Document decisions for legal compliance.
• Control your payroll budget.
• Reward performance in a consistent way.

It also ensures you’re aligned with minimum wage changes, equal pay protections, and state pay transparency requirements—which are expanding each year.

Cost-of-Living vs. Performance Raises: What Is the Difference

Most small businesses mix two types of increases:

Cost-of-Living Adjustments (COLA)

While not legally required, these help employees keep pace with inflation and rising expenses. With inflation still affecting small businesses—46% say inflation is their top challenge—COLA raises help maintain stability on your team.

Performance-Based Raises

These reward employees based on measurable results, like improved service, increased sales, or taking on new responsibilities. Performance raises are powerful motivators, but only when tied to clear goals and documented achievements.

When both types are lumped together without explanation, employees might assume favoritism—one of the biggest legal risks for pay decisions.

How to Build a Legally Sound Review Process

1. Set Clear, Measurable Criteria

Employees should know what success looks like long before review season. For example: “Respond to customer messages within 24 hours.” or “Maintain accuracy rate of 98% in inventory logs.”

2. Document Every Review

Written records matter if an employee ever challenges a raise—or lack of one. Summaries should include:

• Performance goals.
• Achievements and gaps.
• Raise decisions and reasoning.
• Next steps or expectations.

Documentation should always be factual, job-related, and free from personal or subjective language.

3. Be Consistent Across Your Team

If two employees do similar work, their evaluation criteria should be similar. Inconsistency can appear discriminatory even when unintended.

4. Consider Your Budget Before Making Promises

Raises shouldn’t put your business in a financial bind. A clear salary strategy helps you stay sustainable while still rewarding your team.

Questions SMBs Should Be Asking Before Deciding On Raises

Before making pay decisions, take a step back:

• Do I have a fair, written review process? Would employees say they understand how raises are decided?
• Are my criteria measurable and applied evenly? Could I explain my reasoning to a Legal Pro if needed?
• Is my raise structure financially sustainable? Have I planned for increased payroll costs in next year’s budget?
• Could any decision appear biased or inconsistent? Are pay differences based on performance—not personal factors?

These questions help you identify legal and operational risks before they become problems.

What to Do Next

To create a raise and review process that works—and protects your business:

1. Build or update your review template. 
2. Share expectations early. Let employees know what criteria you’ll use before reviews begin.
3. Document everything. Keep written records of evaluations, goals, and raise decisions.
4. Check wage laws in your state. Minimum wage changes and pay transparency rules may apply to you.

A clear, consistent raise strategy helps your team feel valued—and helps your business grow with confidence and fairness.