Employers are often uncomfortable discussing pay raises with employees, and sometimes that leads to raises that are too little, too late.

With today’s tight agricultural labor market, you need to make sure that your employees are compensated adequately. You don’t want to lose a good employee over your hesitation about granting pay raises.

Here are some real-world tips for thinking through employee raises.

Make smart decisions
Employers need to resist the urge to hold the line on employee costs merely because of agriculture’s current economic conditions. Employees play an important role in your business. If they perceive that they are not being treated fairly they may leave your operation or exit the agricultural-labor market altogether.

A good time to award raises is during the annual performance evaluations. This process provides a convenient time to discuss an employee’s performance and establish goals for the coming year. How well the employee has met his or her goals for the past year can be used as part of your pay-raise determination.

There are two main theories on setting employee compensation. These principles can provide a guide to help determine employee raises.

1. What would an employee earn at another pork operation?

You can get this type of information by calling several agricultural employers in your area. Ask specific questions about the tenure and job responsibilities of each employee. Compare notes with your fellow managers to determine what is usual and customary compensation in your area.

Some producers have their key employees call other farming operations to better obtain the compensation data. Thus, your employees understand how their compensation compares with employees of other farms and ranches.

Some land-grant universities conduct periodic employee compensation surveys. Of course, many consultants can provide this type of insight as well.

You want to make sure that any individual working within your operation earns at least as much as he or she would in another comparable operation. You don’t want to lose a good employee to another operation due to low wages.

2. Two reasons to give employee raises.

There are two types of raises – merit raises and cost-of-living raises.

Merit raises should be given as a reward for an employee’s increased productivity, for example, as he or she becomes more familiar with your operation. An employee becomes more valuable to you each year during the first three to five years of employment because he learns your management system and becomes more proficient in executing duties. Merit raises also can be justified if an employee takes additional training, assumes more responsibility or a new position within your company.

Cost-of-living raises are designed to help your employees match inflation. The cost of living increased approximately 2 percent over the past 12 months. Thus, if you have an employee who has been with you for more than five years, then a minimum 2 percent increase in compensation should be given for 2003. You can gather cost-of-living information from investment agencies, banks, The Wall Street Journal and other business publications.

Explain value of benefits 
When you discuss compensation with your employees, you need to consider not only their cash wages, but the other benefits that you offer.

Housing, health insurance, retirement benefits, utilities and food are all standard benefits that agricultural employers offer. Many of these benefits may not be available to employees that hold jobs in other business sectors.

You should list the value of each benefit annually and create a table to help your employees understand the full benefit (or compensation) of working for your operation.

Determining pay raises and discussing them with your employees doesn’t have to be painful. Use these ideas to improve your skill at determining effective compensation for your employees. It will keep everyone happy. 

Editor’s note: Darrell Dunteman is an agricultural financial consultant and accountant. He produces Ag Executive, a monthly ag financial newsletter. A free sample copy is available by calling (309) 772-2168 or writing to Dunteman at 115 E. Twyman St., Bushnell, IL 61422.