Dear SaaStr: When Should You Give Raises? And To Whom?

If you are a founder, manager, or the brave soul in HR who gets to explain compensation decisions with a straight face, welcome. Few topics create more suspense in the workplace than raises. The moment compensation comes up, calendars fill, Slack messages get strangely polite, and everyone suddenly remembers their “expanded responsibilities.”

So when should you give raises? And more importantly, to whom? The smart answer is not “whenever morale is low” or “to the loudest person in the room.” The best raise strategy is part math, part management, and part common sense. In other words: not glamorous, but wildly important.

In most companies, especially startups and scaling SaaS teams, raises should follow a clear logic. You pay for performance, scope, market movement, and retention risk. You do not hand out salary increases like apology cupcakes after a rough quarter. That is how budgets vanish and resentment moves in rent-free.

This guide breaks down how to think about employee raises, merit increases, promotion raises, market adjustments, and pay equity in a way that makes sense for modern businesses. Whether you run a lean startup, a fast-growing SaaS company, or a larger team trying to keep top talent from wandering off to a competitor with nicer swag, here is the practical playbook.

The Short Answer: Give Raises When One of Four Things Happens

If you want the clean version, here it is: most raises should happen when one of four triggers is real and measurable.

1. Give annual merit raises during a planned compensation cycle

This is the standard, healthy, grown-up way to handle pay. Most companies run an annual compensation review tied to performance, company results, market data, and budget. This keeps raises predictable, easier to explain, and less dependent on who barges into your office after reading one inspirational LinkedIn post.

An annual cycle works because it lets leadership compare employees consistently. You can review performance ratings, role expectations, internal equity, salary bands, and market benchmarks all at once. It also helps managers avoid random, emotional decisions. A raise should feel earned and explainable, not like a lightning strike.

For many U.S. employers today, annual raise budgets are not gigantic. That means leaders need to use them carefully. A broad-based annual review is usually the backbone of a compensation strategy, not the whole strategy.

2. Give a raise when someone’s job has clearly become bigger

If an employee is now managing people, owning a larger book of business, leading a bigger product area, or carrying materially more responsibility, that is not “just growth.” That is a compensation event.

Here is a simple rule: if the role changed, the pay should probably change too. Asking someone to operate at the next level while paying them like they are still at the old one is a fantastic way to get compliance without commitment. They may smile in the meeting, but their browser history will soon include “best companies hiring remote.”

This is where promotion raises belong. Not every stretch project deserves more money immediately, but a meaningful and lasting increase in scope usually does. If the company is benefiting from expanded ownership, the employee should too.

3. Give off-cycle raises when the market moves or pay compression appears

Sometimes the market changes faster than your annual review calendar. Maybe you hired a new engineer at a salary that is uncomfortably close to a veteran engineer’s pay. Maybe a revenue leader who joined early is now badly below market because the company has matured. Maybe you finally have the budget to correct under-market pay from your early startup era.

That is when market adjustments matter. These raises are not gold stars for effort. They are corrections to keep pay competitive and fair. They can also prevent salary compression, where experienced employees are paid about the same as newer hires in similar roles. That problem is not just annoying. It destroys trust.

If your team finds out that newcomers are being hired near or above loyal high performers, you have not created a compensation structure. You have created a future resignation letter.

4. Give retention raises before someone is halfway out the door

Yes, retention matters. No, you should not wait for an outside offer to act. By the time a top performer comes to you with another offer in hand, the emotional decision may already be made. Counteroffers sometimes work in the short term, but they are a terrible long-term system.

Smart leaders identify their most valuable people early. If someone consistently drives outsized results, is difficult to replace, and is below what the market would pay, that person deserves proactive attention. In some cases, that means a raise. In others, it means a broader package: bonus opportunity, more equity, clearer path to promotion, or greater autonomy.

Who Should Get Raises First?

Here is where things get interesting. Not everyone should be treated exactly the same, because not every employee creates the same impact, carries the same scope, or sits in the same market position. Fair does not mean identical. Fair means principled.

Top performers with measurable business impact

The first group is your strongest performers. These are the people who deliver consistently, improve results, raise the bar for others, and make the company tangibly better. In a SaaS business, that could be the AE who reliably hits quota without leaving wreckage behind, the engineer who ships critical systems with speed and judgment, or the customer success leader who quietly saves renewals before they become disasters.

These employees should not have to become flight risks before you pay attention. If they are already performing at a high level and are paid below or merely at average market, they are prime candidates for raises.

Employees below market or below the salary band

Sometimes the case for a raise has nothing to do with a brilliant quarter and everything to do with bad compensation hygiene. If an employee is clearly underpaid relative to the market, or sits too low in a salary band given their tenure and capability, that gap should be reviewed seriously.

Underpaying solid employees is not a clever savings strategy. It is delayed spending. You either fix the gap now, or you pay for turnover, rehiring, and lost momentum later. Congratulations, you invented the more expensive option.

Employees whose responsibilities outgrew the job description

Titles lag reality in many companies. Someone gets “temporarily” assigned extra work, starts mentoring others, owns planning, handles escalations, and somehow remains in the same role on paper for nine months. That is not temporary anymore. That is the new job.

When responsibility expands in a durable way, pay should be reassessed. Otherwise, employees learn a dangerous lesson: the reward for being capable is more work and a motivational thumbs-up emoji.

Hard-to-replace talent in business-critical roles

Some roles are simply harder to backfill. That does not mean overpaying everyone in a hot category without thinking. It means recognizing that business continuity matters. If a senior product marketer, lead engineer, or enterprise seller would take six months to replace and the company would feel real pain during that time, compensation should reflect the value of keeping them.

Not the loudest people, not the most dramatic people

A raise strategy should never reward negotiation theater alone. Of course employees can advocate for themselves, and good for them. But if compensation becomes a game won only by aggressive askers, your system will drift away from performance and toward personality type. That is how internal equity gets weird fast.

How Much Should a Raise Be?

There is no magical percentage that works for every company, but there are categories that help. Think of compensation increases in buckets:

• Merit raise: a modest annual increase tied to performance and budget.
• Promotion raise: a larger adjustment because the role changed.
• Market adjustment: a correction when pay fell behind external benchmarks or internal equity.
• Retention raise: a strategic increase for a high-value employee you do not want to lose.

Mixing these up causes chaos. If you call everything a merit increase, employees will not understand why one person got 3%, another got 8%, and someone else got nothing but “great job, champ.” Clarity matters.

It also helps to use a few compensation tools consistently: salary ranges, compa-ratio, performance calibration, role leveling, and manager review. Fancy terminology aside, the idea is simple. Pay decisions should be based on data and defined criteria, not manager mood swings and hallway lobbying.

Why Raises Alone Do Not Solve Everything

Money matters. Let us not get cute about that. Fair, competitive pay is foundational. But pay alone is not the full retention strategy. Employees also care about manager quality, recognition, growth opportunities, flexibility, trust, and whether the company explains decisions clearly.

That means you should not use raises as a substitute for decent leadership. A company with poor management but slightly higher pay is still a company with poor management. People might stay longer, but they will stay grumpier.

The healthiest organizations combine fair pay with visible career paths, honest feedback, and recognition that is not reserved for emergencies. The raise gets attention. The system around it earns loyalty.

The Biggest Mistakes Companies Make With Raises

Using raises as a panic response

If you only review compensation when someone threatens to leave, you are not leading compensation strategy. You are chasing damage.

Giving everyone the same raise

This feels simple and “fair,” but it ignores performance, market position, and role scope. Equal percentages can produce very unequal outcomes.

Ignoring pay compression

Nothing poisons morale faster than loyal employees discovering that newer hires are making nearly the same money for less responsibility.

Failing to explain the why

Employees may not love every decision, but most can handle a clear explanation. Ambiguity is what creates myths, suspicion, and conspiracy theories worthy of a workplace true-crime podcast.

Confusing praise with pay

Recognition is important. So is compensation. One does not replace the other. “We appreciate you so much” is lovely, but it is not legal tender.

A Simple Framework for Deciding Who Gets a Raise

If you want a practical decision model, ask these five questions for each employee:

1. Is this person performing at, above, or below expectations?
2. Has their role grown meaningfully in scope or complexity?
3. Are they paid competitively versus the market and the salary band?
4. Is there an internal equity issue or compression risk?
5. Would losing them create meaningful business disruption?

The more “yes” answers an employee has, the stronger the case for a raise. This approach also helps managers defend decisions consistently. It is harder to argue with a structured process than with “Well, my gut says Chad feels expensive.”

Examples of Smart Raise Decisions

Example 1: The underpaid high performer

A customer success manager has top-tier retention numbers, mentors new hires, and sits clearly below market pay. Give the raise. This is the easy one.

Example 2: The solid performer with no role change

A reliable team member meets expectations, but the role has not changed and the salary is already in range. A standard annual merit increase may be enough. Not every good employee needs a dramatic adjustment every year.

Example 3: The newly expanded leader

An individual contributor now manages a team, owns planning, and carries broader accountability. That likely calls for a promotion raise, not just applause.

Example 4: The hot-market specialist

A machine learning engineer or revenue operator becomes much more expensive in the market, and your internal pay has fallen behind. Consider a market adjustment before recruiters do the reminding for you.

500 Extra Words: Real-World Experiences and Lessons From Raise Conversations

One of the clearest patterns in raise conversations is that employees usually know whether the discussion feels fair long before they hear the actual number. That sounds dramatic, but it is true. If the company has explained expectations, role levels, and performance standards throughout the year, the raise conversation tends to feel grounded. Even when the increase is smaller than hoped, employees can see the logic. When expectations were vague all year and compensation shows up like a surprise plot twist, even a decent raise can feel random.

Another common experience is that many managers delay the conversation because they are uncomfortable. They worry the raise will not be big enough, the budget will look stingy, or the employee will ask hard questions. So they postpone, soften, and over-explain. Ironically, this usually makes things worse. Employees would rather hear a clear message than a nervous TED Talk about “macro conditions.” The best managers are direct: here is how we evaluated your performance, here is where you sit in the range, here is what changed, and here is what the next step looks like. Clean, calm, respectful. No theatrical fog machine required.

There is also a very real difference between employees who want more money and employees who want acknowledgment that they have grown. Sometimes leaders assume every raise request is mainly about cash. It often is not. Quite a few people are really asking, “Do you see what I am doing now?” That is why promotion raises matter so much. An employee who has stepped into broader ownership may feel insulted by a generic merit increase, even if the percentage is technically fine. They are not only asking for extra dollars. They are asking for the company to recognize the level at which they are already operating.

Founders in particular learn a hard lesson here. In the earliest startup days, everyone may take a discounted salary, wear six hats, and run on optimism, caffeine, and suspiciously cheerful investor updates. That can work for a while. But once revenue becomes real, under-market pay stops feeling noble and starts feeling outdated. Teams remember who joined early. They also remember whether leadership corrected that gap once the company could afford to do so. Some of the strongest loyalty is built when leaders say, in effect, “You took a bet on us, and now we are going to make that right.”

Finally, one repeated lesson from real compensation decisions is that the worst time to discover someone is underpaid is after a recruiter already did the math for them. At that point, the raise discussion becomes reactive and emotional. The company feels cornered, the employee feels newly valuable, and trust gets weird. The healthier pattern is proactive review. Look at top performers before they complain. Audit compression before it becomes gossip. Revisit role scope before burnout becomes bitterness. The best raise strategy is not the most generous one. It is the one that is clear, timely, market-aware, and credible enough that employees do not feel they need an outside offer just to start an honest conversation.

Final Takeaway

So, when should you give raises? Give them on a regular annual cycle, when roles grow, when market data says pay is out of line, and before critical talent drifts into preventable flight risk territory. And to whom? Start with high performers, under-market employees, people with larger responsibilities, and those in business-critical roles where replacement costs would be painful.

The best compensation strategy is not about generosity theater. It is about disciplined fairness. Pay people competitively. Correct inequities quickly. Reward real impact. Explain your decisions. And do not wait until your best employee is updating their résumé in a browser tab labeled “totally not quitting.”