Business Math Series: How to Calculate Pay Increase by Percentage

When it’s time for the annual performance review or annual raise, you need to know how to increase your employee’s pay correctly.

Generally, you will want to increase their pay by some percentage. The national average pay increase was expected to be 3% for 2013 but many companies increase salaries by only 1% per year – just enough to account for inflation – and by some higher percentage for merit based increases.

Calculating the percentage

We talked about percentage yesterday, in the post about calculating sales tax. Now we’ll relate percentage to pay increases. When your employee is ready for a pay increase, decide what percentage is fair and then do the following calculation:

Step 1: Convert your percentage into decimal form. This will give you a number that you can use to multiply by the employee’s current pay rate. To do this simply take the percentage you wish to use, say 3%, and move your decimal over to the left two places. .03 gives you a real number you can work with.

Step 2: Multiply by the employee’s current pay rate by that decimal. If your employee makes $15/hour, then you have: 15x.03=.45. So your employee’s increase is 45 cents per hour. For an employee who makes a salary of $45,000/year, then you have: 45,000x.03=1,350. So your salaried employee’s pay increase is $1,350 per year.

The Meaning Behind the Conversion

The percent symbol is used to tell you something about the number it sits beside. Percent means ‘parts per hundred’. So if a % sign sits beside a 3, it really means 3 parts per 100. You don’t need to know this to calculate a pay increase but it might help you to understand why you need to convert the percent into decimal form to begin with. 3% tells us we need to multiply our pay rate by 3 pieces of a hundred.

Do you remember what the decimal places mean? The first decimal place is the tenths place and the second is the hundredths place. This is why when we convert our percent we have to move two places – we have to open up the hundredths place.

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