Hearing these words often causes the knees to knock and the stomach to churn for any business owner or manager. I think I have this conversation with each of my clients at least once a year. If it makes you feel any better please be assured that the person asking the question is usually just as terrified to ask as you are to hear the question. This is one of those questions that must be answered, clearly, fairly, and in a timely fashion.
I am asked how the owner or manager should answer this question and I think it is a fairly simple process to follow, that doesn't mean it is easy, it just means it is simple.
These are the 4R's to handling the pay rise question.
Turn the question back to them and ask them why they believe that they have earned a rise in pay. Listen very carefully to the answer they give. They may need time to think about it, let them take that time and come back to you. You can do your own thinking during this time. When they give you an answer, listen to understand the perspective that they have taken. An answer along the lines of "Well I want to buy a new boat and need more money" says that they are thinking all about them, and not about the results they create for your business. It is straight forward, not easy however, but straight forward to say no to this request.
What we really want to hear is an explanation about how they are creating even more value for the business and doing more work thereby deserving a higher pay packet. An answer that is more attuned to "Well boss, I have been filling in for my boss every time they go on leave for the last few months and the place does not miss a beat whilst they are gone. I have implemented some new systems for how we [control stock/answer calls/ship on time/improve quality] and the results have been that we are making more money" An answer like this shows a focus on creating value for the business and an indication that the improved performance has been sustained over a period of time.
Look at the answer that they have given and then review the wages you are paying the person and people who have similar roles and similar responsibilities. If the person is performing at a higher level than others being paid the same then they may be justified in asking for more money. If their peers are actually performing poorly in comparison then you have some work to do to performance manage others as well as look at the pay rates of the employee who has queried you. Tolerating poor/low performance is unacceptable if you want a commercially superior business.
Look at you financial performance and make sure you can afford the pay rise. If you want to give the pay rise but cannot afford to do so then it is time for a good long look in the mirror. If you are underpaying good employees who are worth more then you are almost certainly underpaying yourself. When is a good time to stop kidding yourself and make the changes you have been avoiding so your business performance improves and you can pay yourself and others what they are worth? Yes, that is harsh, No I won't apologise. Face up to it and fix it.
If the answer you have come up with is Yes or No I suggest you layout a roadmap for the employee. If the answer is Yes then the roadmap is about the new job responsibilities and roles that must be fulfilled that justify the increase. Be clear and specific. The discretionary effort they have show to convince you of their value is now 'normal' effort and they need to keep lifting the bar.
If the answer is No then explain the roadmap to improved performance that the employee must comply with before you consider any further requests for a raise. Make it clear and specific. The choice is then up to the employee. Make sure you are prepared to say Yes if they come back and have met the benchmarks you have set.
In all of these conversations you want to create, maintain, and strengthen the rapport you have with the employee. You can even give them the bad news and have them understand the changes they have to make and leave the conversation without having any resentment if you have rapport with your employee.
If you follow the 4R's you should find it easier to handle this dreaded question (it should not be a dreaded questions by the way) and work through the issue fairly and clearly. The best outcome is if you can go tot the employee in advance of the question and reward them for their superior performance knowing that you can afford it, the business can afford it, and it helps to ensure their loyalty to the company.