Caller Says His Employees Are Unhappy With Their Raises. Dave Ramsey Responds, ‘A 2% Raise In A 9% Inflation Economy Is Insulting’

Blake from Lincoln, Nebraska, recently called into Dave Ramsey‘s “EntreLeadership” podcast with a problem many managers face: employees who are frustrated with their raises.

Blake, the controller of a physical security company with about 100 employees, explained their current compensation system: a 2% cost-of-living raise every year, plus up to 3% more based on merit. But the merit side was getting messy.

“We really haven’t clearly identified or defined what a 1, 2, or 3% merit increase would look like,” Blake told Ramsey. That lack of clarity has resulted in employees interpreting anything less than 3% as a sign they aren’t doing a good job.

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Ramsey started by sharing what they do in his company. “We don’t do any cost of living,” he said. “We do marketplace adjustment.”

Instead of basing raises on inflation or arbitrary percentages, Ramsey ties compensation to market value. “You don’t get a cost-of-living raise just because cost of living went up,” he said. “You get raises because the position that you are in now pays more than it used to pay.”

He explained how his team looks at salary ranges for roles in their region and adjusts accordingly. “You’re at the bottom end of that range and you’re doing a great job, so we’re going to move you up to the mid-range,” he said. Ramsey even shows employees the market data to support the numbers.

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“A 2% raise in a 9% inflation economy is insulting,” he added, referencing recent years of high inflation. “[In some years] we’ve had no inflation. We’ve had a contraction, meaning a recession. We haven’t tried to monitor all that. It’s reflected indirectly in what it costs to hire someone for a position.”

Ramsey also discourages using specific merit percentages. “We don’t have any percentages involved,” he said. “That way, I don’t have any comparison issues. It’s just, this is what this position is worth, and you’re exceeding what it’s worth by doing these things.”

Blake mentioned the tension is most noticeable in a group of 25 to 30 employees. Ramsey said that’s common. “That 25 to 30 is probably where all your problems are happening.”

He also acknowledged how difficult it is to structure compensation for support roles, where performance isn’t tied to obvious revenue. “I’m so straight commission-oriented, I’d put the freaking receptionist on straight commission if I could figure out a way to structure it,” Ramsey joked.