The message is out: Employee salary budgets are increasing.
However, don’t get too excited. Wages were up 5.1% in November, year-over-year, according to the U.S. Labor Department. That’s up significantly from the 3.0% increases in salary budgets we have seen over the past decade but nowhere near current inflation rates. The consumer price index rose 7.7% in October, year-over-year.
Salary budgets are not intended to keep up with inflation, rather to align with what companies are able, or willing, to spend. The balance between wages and inflation is causing most business to assess where their dollars will have the most impact on the success of the company. Differentiation of pay is what is needed.
As business returns to pre-pandemic levels, the need to have a solid return on investment is critical to manage company costs. To obtain essential profitability, a review of where your employees are paid compared to market rates of pay is essential.
Additionally, this assessment must include an honest performance and productivity measure. Are some of your employees “quiet quitting”? This term has been used a lot lately. It can have a significant effect on your business. Quiet quitting is really a way of saying that some employees are just coasting along and not as engaged as you would like them to be. How does an organization stir that engagement to make a real difference in the productivity of individuals and teams? The answer falls on management to establish clear goals and expectations for performance.
When determining 2023 base salary increases, I encourage management of each company to assess how well each person is paid in relation to competitors and how their performance meets expectations. You normally can get a pretty good gage on what the market is paying for certain jobs if you try to recruit. Otherwise, you may need to purchase salary data from a published source or through an agency for an unbiased review of competitive wages. The competitive wage assessment is just the first step to determine what is an appropriate increase for the individuals on your teams.
Next, taking a hard look at the work outcomes and performance of each person is the only way to determine if your expectations are being met. Without an assessment of the overall impact the employee has to the bottom line, your company is losing out on critical funds that could be allocated to other key employees. The methodology to determine the amount of base salary increases is a combination of where the employee is paid compared to market and their individual performance level.
Over the past two or more years, we have been dealing with employee shortages and therefore have been bending company practices to get people in the door. It is evident that the trend that allows employees more autonomy to work from home one or two days a week has clear advantages. However, the employee should be made aware that they are still accountable to get their work done. I pose another option, which will allow the employee to earn additional compensation: establish a well thought-out incentive plan.
Incentive plans
Incentive plans are variable pay, which is tied to the accomplishment of key metrics established between the employee and their manager. Most incentive plans start out with a “hit or miss” target of company profitability; this overarching metric provides the pool of dollars that can be allocated to your teams. Using this starting point, if the company is not making money, no one receives incentive pay. Next, determine what metrics are measurable and are directly under the responsibility of the individual. Bringing the employees in on the development of metrics and target levels of performance will ensure their buy-in and acknowledgement of what needs to be done to receive extra compensation. Developing an incentive plan that rewards your employees for meeting key performance indicators can be a very motivating tool, if done correctly.
Think about what your salary increase budget spend should be. If you are coming up with more than 5.0% to meet market rates of pay, you may need to gradually increase salaries over time. However, a strong incentive program driven off company profitability could be the saving grace to get your employees fired up on providing the extra effort needed to get the job done. Your communication with staff on how each employee’s efforts help the company as a whole can go a long way to build a culture of teamwork and engagement. We all want to be part of a team and know what we do really makes a difference.
