We have talked a lot recently about employee engagement and rewarding employees for their hard work. But what should you do if an employee asks for a raise, and even if you would like to be able to increase their pay, you cannot afford to do so? In a perfect world small businesses would have unlimited resources to be able to reward great employees accordingly, but that is not reality. This can be a tough situation, but if handled correctly, it can be an opportunity to demonstrate your commitment to your employees without monetary rewards. A recent article from Payscale gives some great ideas on how to make the best of this situation:YesNo

Listen to the employee: Find out why they believe they deserve a raise. If you agree, but are unable to afford the increase in salary, find out if there are other perks that could appease the employee (flexible work time, an extra day off, etc.). Having this conversation will give you insight into what behaviors the employee believes deserve recognition and what non-monetary rewards might motivate the employee. It can also be a good time to explain your company’s compensation structure and what behaviors warrant more pay within your organization. Some people still believe that longevity warrants an increase in pay, but we would suggest that contribution to the organization is what really counts. Listening to their reason may let you know that you need to better communicate your compensation philosophy to your employees.

Take time to consider the request: Rather than immediately telling the employee that the company is not increasing any pay this year, or that you are unable to offer the raise at this time, take some time to think about the employee’s request. Let the employee know you will consider it, and give them a timeline for coming back with the answer. That way even if the answer is no, the employee feels that you respect them since you took the time to consider the request. This will also give you some time to consider a non-0monetary reward that might help to motivate the employee without breaking the bank. When you do come back to the employee, remind the employee that you value what they do for the organization.

Provide your reasoning for saying “no”: If you just tell an employee “no” to their raise request, you are missing an opportunity. If the reason you are saying “no” is because the employee does not deserve the raise, this can be a great time to talk about expectations and provide some feedback. If you are saying “no” because of financial restrictions, you can let the employee know that (without revealing too much) and let them know when you will be able to reconsider their request. Being open and honest in these situations increases employee trust and loyalty, which are huge for employee engagement and retention.

Be straightforward: If you are providing feedback to the employee on their performance, be honest and straightforward. Do not sugarcoat your responses. The kinds of employees who you really want working for you are the ones that can accept constructive feedback and apply it. Of course, it is important to balance positive and negative feedback and provide this feedback continuously. If you are waiting for employees to ask for a raise before discussing performance, you are waiting too long.

Offer support and assistance: If the employee does not qualify for a raise, let them know what they would need to do to change that. Offer support and help them to succeed. Great leaders want to see their employees advance, learn and grow.

Do you have a story to share about a time an employee asked for a raise and you had to say “no”?