A salary increment or a salary hike is what most people look forward to as the culmination of their year-long efforts and toil at work. A salary increment is also an interesting reflection of the human mindset. Just like a vacation is never long enough, a salary hike is never sufficient in the minds of the employees.
Well, humour aside, a pay hike is an important part of the yearly working calendar and is usually determined as the percentage of your annual salary. Furthermore, it forms a crucial baseline for salary negotiations with prospective employers if you have been contemplating a change in role, position, or company.
Let us examine the various aspects associated and how to calculate salary increments.
The salary increment is usually dependent on the employee’s performance appraisal for the year. Employees are assessed based on yearly targets, key performance indicators (KPIs), and key responsible areas (KRAs) and awarded a performance rating, like Average, Exceptional, and so on. The eventual salary increment is a function of this rating.
While a lot of organisations are moving away from the concepts of annual appraisals and employment bell curves, this still remains the predominant way to determine the annual salary hike.
Your performance is a crucial factor, but it is not the only one that determines how much hike you will receive. Other vital factors include:
Some companies provide salary increments in the form of an absolute figure. In such a case, knowing how much of a hike has been awarded to you is rather straightforward. However, the more traditional method is to offer a salary increment as a percentage of your current salary. This can be over the annual CTC (cost to the company) or as a percentage of the monthly gross.
If your company is used to providing a percentage hike, then it becomes imperative for you to understand how much the hike actually translates to. Before we get into the actual calculation, let us first know some of the important terms used in salary calculation.
Now, let us understand how to calculate a salary increment across the common scenarios in which increments are declared by employers, as described below. For the purpose of calculation, let us assume your monthly salary is ₹50K.
In this, the company provides a letter informing employees of their new salary (post the pay hike). Let us presume your new salary is ₹60K. You can calculate your salary increment percentage using the formula:
[(new salary) - (current salary) / (current salary)] x 100
Let us put values in it to see it in action. Assuming your initial salary was ₹50k
[(60K - 50K) / 50K] x 100 = (10K / 50K) x 100 = 20%
Another common way of informing employees regarding their increment is by providing the figure for the raise in the salary. In case you have received an absolute increment of ₹10K per month, then this is simple to calculate using the formula:
[(increment amount) / (current salary)] x 100
This translates to (10K / 50K) X 100 = 20%
The most common way of notifying salary increments is by providing a percentage hike over the existing salary. The origins of this method stem from the need for confidentiality of pay scales among employees with the intention of keeping down comparisons and related squabbles.
If your employer, too, offers a percentage hike, then you need to translate it into an actual figure. Let us assume you have received a 20% hike this year. The formula for this is:
[{(percentage hike) x 1/100} x (current salary) + (current salary)]
Here is how it works out, stepwise, in the current assumption.
[(20 x 1/100) X 50K] + 50K
[(20/100) x 50K] + 50 K
(0.02 x 50K)+50K
10K + 50K = 60K
As you can see, there are different paths to arrive at the same destination. It almost entirely depends on how your organisation rolls out salary increments.
Now you know how to calculate a salary increment in different scenarios. In case you’re wondering why you need to do so, well, the answer is simple – better financial planning. Knowing the exact additional amount you will receive per month helps you plan your expenses, savings, and future investments better.
Suppose you were able to manage your expenses comfortably with your current salary of 50K. Now that you will receive an additional 10K per month, it is the ideal opportunity to start investing in a long-term wealth-building financial tool like a Mutual Fund.
Start a monthly SIP and see how your money multiplies using the power of compounding. You can even choose a tax-saving fund to get additional benefits under Section 80C of the Income Tax Act, which allows a yearly deduction of up to ₹ 1.5 Lakhs. With 10K per month, you can easily save ₹ 1.2 Lakhs in tax and grow your wealth over time without having to make any extra effort for it.
The global pandemic and related economic slowdown had a direct impact on wages and salary increments of employees. Fortunately, the worst is behind us, and things are looking up.
While the actual increment depends on several factors (some of the prominent ones have been mentioned in an earlier section of this article), reports suggest that salary increments are close to reaching pre-pandemic levels in the private sector.
An average of around 9% is the general consensus among HR experts, but this can vary significantly among sectors, companies, and roles.
The steps to calculate salary increment have been described in detail in a previous section of this article. The formulae for calculating the increment in the three most common scenarios are:
