Salary increase for employees: when to apply it and how to complement it

Retaining and motivating talent in today’s competitive labour market is a strategic balancing act. Offering a salary increase is one option—but to be truly effective, it needs to be part of a broader, sustainable compensation strategy. Employee expectations have evolved, and the most successful companies combine competitive pay with benefits, career growth opportunities, and workplace flexibility.

Across Europe, salary decisions also involve navigating diverse labour laws, social security systems, and tax structures. This means organisations must carefully weigh the financial impact, legal obligations, and the message a pay rise sends to their workforce.

Is a salary increase always the best option?

While a salary increase remains a powerful motivator, it’s not always the most sustainable or strategic choice. European employers face budget constraints, tight profit margins, and internal equity considerations that must be factored into the decision.

In many EU countries, a salary increase triggers:

• Higher employer social security contributions, often between 20%–35% of the gross salary, depending on the country (Eurostat – Labour costs).
• Increased income tax for the employee due to progressive taxation (European Commission – Taxes in Europe Database).

These costs can significantly reduce the net benefit perceived by the employee while creating a substantial budget impact for the employer.

What does a salary increase imply for the employer?

Beyond the agreed gross pay, the true cost of a salary increase for the employer includes:

1. Gross salary as stated in the employment contract.
2. Employer social contributions: pension, healthcare, unemployment, accident insurance—varying by country.
3. Indirect effects:
   • Maintaining internal pay equity by adjusting other salaries.
   • Possible renegotiations with works councils or unions.
   • Increases in salary-indexed benefits.

Example: In a country where employer social contributions are 30%, a €2,000 annual raise actually costs the employer around €2,600. Across large workforces, this impact can run into hundreds of thousands of euros annually.

When is a salary increase justified?

Salary increases are most strategic when they are:

• Linked to exceptional, sustained performance, measured through clear KPIs. This reinforces a merit-based culture and transparency.
• A result of expanded responsibilities—such as leading new teams or managing critical projects.
• Designed to retain key talent—often more cost-effective than recruiting and training replacements.
• Market-driven—aligned with sector salary benchmarks to remain competitive and reduce turnover risk.
• Part of scheduled reviews—to avoid salary stagnation and maintain motivation.

Clear communication of the criteria for increases helps reduce misunderstandings and fosters trust.

Beyond pay: What do employees expect today?

Salary matters, but modern employees value the total package—a combination of tangible and intangible benefits:

• Flexible working arrangements: not just remote work, but flexible hours that accommodate personal and family needs, improving work–life balance and productivity.
• Comprehensive well-being programmes: mental health support, sports or gym allowances, ergonomic workspaces, and wellness workshops.
• Career development opportunities: structured career paths, internal mobility, mentoring programmes, and access to certified training signal long-term investment in staff.
• A culture of recognition: celebrating successes, acknowledging contributions, and providing regular, constructive feedback strengthens belonging and engagement.

Complementary measures when a salary increase is not possible

When financial constraints prevent a pay rise, there are alternative ways to enhance employees’ overall compensation experience:

• Funded training and professional development: boosting skills benefits both the employee and the organisation.
• Tax-efficient fringe benefits: meal vouchers, transport subsidies, childcare support, or health insurance—often partially or fully exempt from income tax and social security contributions (European Commission – Taxation and benefits).
• Corporate discounts: solutions like Vip Savings help employees increase their purchasing power without increasing payroll. This digital platform offers exclusive discounts on groceries, fuel, leisure, technology, and more—generating tangible value without creating extra tax or administrative burdens for the company.

Integrating benefits like Vip Savings into your total rewards strategy demonstrates care and creativity in supporting staff beyond salary.

Salary increases are powerful—but not the only tool

A salary increase remains a vital retention and motivation tool—but it should be applied strategically, with full awareness of its long-term cost and implications.
Organisations that combine well-planned salary adjustments with non-monetary benefits, flexible work policies, and meaningful development opportunities create a stronger, more attractive employee value proposition.

Looking beyond salary is not just a trend—it’s an essential approach for attracting and keeping talent in today’s European labour market.