Tesco said it will hand around a quarter of a million staff a 10.5% pay rise, marking its biggest investment in store pay for 10 years.
Britain's biggest grocer will boost the hourly pay rate for 250,000 workers from £7.62 an hour to £8.42 by November 2018.
However, the firm will also cut pay for staff working Sunday and bank holidays, with wages shifting from time and a half to time and quarter from July 2018.
Matt Davies, chief executive of Tesco UK, said: "This reward package sees our biggest investment in store pay for a decade, and gives colleagues a sustainable pay deal that rewards them for everything they do, while allowing us to also attract new talent.
"We also want to do all we can to help working parents and that's why we are proud to offer a much improved maternity package to our colleagues."
The pay boost will be rolled out to workers in three stages, rising from £7.62 to £8.02 in November 2017, before climbing from £8.02 to £8.18 in July 2018, and finally stepping up from £8.18 to £8.42 in November 2018.
However, staff will earn an equivalent hourly rate of £9.52, once benefits are taken into account such as bonuses and pension payments.
Tesco said the pay rise, which was agreed after talks with the union Usdaw, will leave 97% of staff better off.
It added that staff working Sundays and bank holidays who are left worse off from the deal will be handed a lump sum on July 2018 to make up the difference for the next 18 months.
The move comes after Tesco announced on Wednesday that it would axe up to 1,100 jobs as part of plans to shut its call centre in Cardiff.
Tesco has more than 6,000 shops across the world, employing 460,000 staff.