Your employee wants a raise. Here are 7 ways you can afford it.

The opinions expressed by entrepreneurs contributors are their own.

Your employee is asking for a raise. And you can't blame them. Inflation is between 7 and 8% and people have to, at the very least, keep up with the cost of living. It's now the norm in 2023. It's happening everywhere. Payroll company ADP recently reported that employees had received 7.3% more pay in recent months – employees changing jobs seeing more than double that amount. And many experts say this trend will continue throughout this year.

But giving raises is certainly easier said than done. Larger companies may be able to absorb the additional costs. But if you're running a small or even a medium-sized business, it's not that simple. The good news is that there are options. So before doling out that raise and taking on that extra expense, here are seven things you can do to lessen the impact.

Related: "Ask for a Raise Now": Salaries Not Keeping Up with Inflation. Here's what to do.

1. Link the increase to performance

Think of a benefit as a sharing plan for your employees or a bonus for achieving agreed-upon goals. When someone asks for a raise, it can be seen as a mutual opportunity. You may be the only one who happily agrees to pay this increase - perhaps even more than what is asked - as long as you receive something in return. People don't have to be in sales to earn a commission. You can set specific job-related goals that increase revenue and productivity or reduce expenses to achieve a specific return on investment, with additional benefits shared.

2. Offer more power grip and flexibility

Instead of increasing salary, consider increasing vacation pay. Or offer more flexible working hours. Or maybe it's time to implement a four-day workweek schedule or extend the benefits of working from home.

Remuneration doesn't always have to be cash. People value their time just as much. Flexibility is important, and one of the biggest benefits of working for a small company is the ability to have that flexibility without the bureaucratic oversight experienced by large company employees. Yes, paying someone not to work is always an extra cost to you. But if you both agree on the deliverables of the job, you and your employee can make sure the job is done on a schedule that works for both of you.

Related: Employers Need Workers. Now they realize the untapped talent of these people.

3. Pay more for health insurance

Many business owners forget that, in most cases, health insurance payments are non-taxable for the employee while being deductible for the employer. If you simply give a raise, the employee is taxed and you have to pay payroll taxes to the employer. But if instead you offer to pay more for health insurance, you both save money on taxes and the employee gets more in their take home pay. It's a win-win. Of course, talk to your tax accountant to make sure there are no other factors that would impose this benefit.

4. Pass the cost on to customers

If you increase the salary of your employees, you can consider passing on this cost increase to your customers in the form of higher prices or fees. But be careful. You don't have to pass on the full amount of a raise if you can find savings elsewhere. And if you spread the cost across all of your overhead, then...