Looking to Benchmark Pay?
Feedback from key internal sources
It is helpful to keep a record of all the information received, from key internal sources, of issues which may need to be resolved within a business pertaining to the upcoming salary plan. The recruitment staff is a valuable source of information regarding issues they have experienced with the current salary structure. Management and Human Resources input is invaluable to ensure key issues are addressed in the company's annual plan and exit interview summaries can also identify organizational compensation issues.
Financial ability to pay and state of the business
Compensation is a high percentage of the overall total cost of doing business and needs to be carefully managed.
Let's take a look at "ability to pay" from the organization's perspective:
| Financially secure times | Poor financial times |
|---|---|
| Organizations are likely to use salary increases to maintain or improve their competitiveness in the labor market. | Organizations may need to take steps to reduce labor expenses and may not feel they can keep up with the competition. |
It is important to work closely with your senior management and Finance as plans are being made for the following year's salary increase budgets. The business must have the financial ability to pay for the planned increases.
Finance will typically assess the cost of compensation for the current and projected year against key financial metrics to determine the company's ability to pay, such as:
- Total Salaries as % of Revenue
- Total Salaries as % of Operating Expenses
When there is a shortfall in the ability to pay for planned salary increases, these options may be considered to manage the costs:
- Reduce the salary increase budget
- Defer the timing of the planned increases. A salary increase budget of 5% effective on January 1 can be reduced by 50% to 2.5% if increases are deferred to July 1 for the plan year. It would build, however, to 5% for the following year.
- Broaden the salary ranges to reduce adjustments to a minimum
- Eliminate any market place adjustments or internal equity adjustments
- Start-up firms may use stock options in addition to cash compensation to manage their cash outlays
- In the event of severe financial difficulties such as those presented in 2008, consider eliminating the entire salary increase budget. Many companies during this time also implemented unpaid time off programs which produced substantial savings to payroll costs and the majority of employees happily took unpaid time off to retain their jobs and support the company in managing costs. This was at a time when companies were having hiring freezes and implementing reductions in their workforce as well.
- The 2020/21 pandemic was unique in that it affected industries differently. Most 2020 pay increases were administered prior to the start of the pandemic, but the pandemic abruptly caused layoffs, furloughs, shutdowns, hiring, and salary freezes within many industries. Some companies thrived, while many employees adapted to working from home. Both 2020 and 2021 were projected at more conservative salary increase budgeting than in prior years.
Is the Recommended Program Implementable?
Always ask yourself if the recommended compensation plan is implementable. How will the program be received by management and employees? Is the program fair, competitive, and equitable? Is the money fairly and appropriately distributed within the organization?
Total Labor Costs
Are the total labor costs for your organization competitive for your industry, labor market, and size of company? Are the jobs and employees appropriately paid to attain internal equity and market competitiveness? Are the company's compensation practices compliant with the applicable labor law? Is the plan financially affordable and implementable?
Memory Jogger
Your organization is planning large salary increases at the start of next year. What message will this send employees?