How to Calculate a Salary Increase

Calculating pay increases is an important element of personal financial management. It permits you to evaluate how your pay is keeping pace both with inflation and with your own goals and objectives. A relatively straightforward exercise, calculating a pay increase is nevertheless frequently misunderstood, as are the reasons for doing so.

Determine the Amount of the Increase

Step 1

Subtract your old pay rate from your new rate to determine the dollar amount of the increase. For example, if you are currently making $40,000 annually and your new salary will be $42,000, the dollar amount of the increase is $42,000 - $40,000 = $2,000. The concept is the same if you earn an hourly wage. For instance, if your old hourly rate was $11.75 and your new rate is $12.50, the amount of the increase is $12.50 - $11.75 = $0.75.

Step 2

Divide the dollar amount of the increase by your old salary to determine the percentage increase. For the example in Step 1, the salary increase percentage is $2,000/$40,000 = 5 percent. The hourly wage percentage increase is $0.75/$11.75 = 6.38 percent.

Step 3

Benchmark your salary increase to inflation and raises received by your peers. If the rate of inflation exceeds the increase percentage, your purchasing power is likely declining. You may also want to compare the growth in your pay with that of your peers. Finally, if you have a career plan mapped out, you should also consult that to see if your new pay is about what you expected it to be at this point.

Tip

Remember that pay increases are cumulative, and bonuses are not. If you receive bonuses but no increase in your base pay, your purchasing power is declining whenever inflation is above 0 percent. At the very least, you want your regular pay to keep pace with inflation.

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