Maximizing Your Total Rewards Budget
How to offset stagnant wages with tax-advantaged benefits – making a 1% raise feel like 3%.
Key Takeaways
- Traditional raises lose value to taxes. Tax-advantaged benefits mean 100% of the funds reach your employee, delivering even greater real-world impact.
- Section 127 lets employers contribute up to $5,250 tax-free toward employee student loans, lightening a burden you might not realize your employees are carrying.
- Even a small raise can create large financial value. By reducing loan interest and shortening repayment timelines, a tax-free 1% raise can bring more value than a traditional 3% raise.
- Creative total rewards strategies help employers retain talent even when salary budgets are tight. Talk to an Expert to learn how to start your own student loan benefit.
Many leaders eventually face the same uncomfortable conversation: your employees deserve bigger raises than your budget can support. It's especially difficult when they're performing well and competitors can simply outspend you.
That dilemma came up during a panel I recently joined, and it immediately took me back to the years I ran my tech company.
Every review cycle, I was competing for the same engineers and developers that big tech firms wanted. These companies could hand out raises like it was nothing, and I remember sitting across from people I genuinely didn't want to lose, knowing a recruiter with a much bigger budget was probably already in their inbox.
The reality was that I couldn't match a bigger company’s number. Not even close. So I stopped trying to match what they were offering and started making what I could afford deliver more value.
For years, the average raise has hovered around 3%. That's a benchmark most employees consider standard, whether they've read a salary survey or not. That's what the big firms could hand out without blinking, but my budget only had room for about 1%.
To put this into perspective, the difference between a 1% raise and a 3% raise on a $60k salary is $1,200. That’s a huge gap between what a skilled employee expected and what I could actually fund. Unfortunately, the 1% raise at $600 reads as “we don’t value you,” even when that wasn’t the case at all.
The problem with traditional raises is that they’re surprisingly inefficient. After federal income taxes and payroll taxes, roughly 30% disappears before employees ever see it. Even if I'd scraped together the full $1,800 they were expecting, they'd have only netted around $1,260 of real value.
I started asking a different question: if I couldn't afford a larger raise, where could the same money create the biggest financial impact? The answer was student loan debt.
The more I looked into student loan debt, the worse I realized the issue was. The average federal student loan borrower carries around $39,547 in student debt. That’s a lot of money hanging over an employee’s head day to day.
Luckily, I also learned that under a Section 127 plan, employers can annually contribute up to $5,250 per employee tax-free for both parties.
That meant there was a way for all $600 of my raise to reach them. On top of that, putting the raise as a supplemental payment shaved an entire month off the employee’s payoff timeline, saving hundreds in interest and monthly payments. Put all those savings together, and my tax-free 1% raise would have given them roughly $1,370 in value – more than the traditional 3% raise delivers after taxes.
I want to make one thing clear: I wasn't trying to spend less on my employees. I was trying to spend smarter so they got the value they deserved. That's ultimately why Paidly exists. I wanted smaller employers like me to have a way to compete for and compensate talent without needing Fortune 500 budgets.
Make Your Raise Work Harder
Of course, knowing about Section 127 is one thing, administering it is another. Tracking loan servicers, verifying payments, monitoring IRS limits, and managing documentation can quickly become overwhelming. That's exactly the administrative burden Paidly was built to remove.
We handle student loan repayment and 529 contributions as a turnkey, tax-advantaged benefit: employees securely link their own loans or accounts, we send payments directly where they need to go, and we track the compliance limits so your HR team never has to. It’s simple for you, easy for HR, and meaningful for your team.
A key thing I learned during my tech company days is that employees judge raises by the impact it has on their lives. Helping them eliminate debt or build savings does more for them in the long run than another taxable paycheck.
If your budget looks a little tight this year, talk to an Expert about giving raises that go the extra mile.
Ready to get started?
John Scully, CEO
John Scully is a seasoned executive leader with a strong background in business operations and technology. As Co-Founder of Paidly Student Loan Benefits, he empowers employers to enhance talent recruitment and retention through a cloud-based platform that allows tax-free student loan payments. With experience in industries like healthcare and fintech, John has held leadership positions at companies such as Sharp Notions and the University of Rochester Medical Center. Holding an MBA from the University of Rochester and a B.S. from Excelsior College, John is dedicated to helping organizations and individuals navigate the complexities of Fintech, especially student loan payments.
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The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Paidly shall have no liability for the information provided. While care has been taken to produce this document, Paidly does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.
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