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As we approach the turn of the year we arrive at a time when traditionally increases in salary are considered and for the lucky, delivered. I saw a recent article on how to say “no” to an employee in the best fashion. However should we be saying no? And what needs to be considered before we say no?

 

 

salaries

 

 

This is a far more complicated question than meets the eye and the ramifications for poor decisions run deep. Many see the increase in salary as a simple cost and one that they are keen to avoid. Getting the decision wrong however can cost very significantly more than a marginal rise in fixed costs on a budget sheet.

Labor has always been one of the purest markets with compensation determined fundamentally by demand versus supply. Educational, training and skill level entry barriers reduce supply and demand increases with growth and expansion of industry and economies. Your ability to hire and retain staff depends pretty much on the value of your overall comp package. Salary, benefits, performance comp etc. In a liquid market you might want to pay your people less and cap compensation expenditure on your budget but depending on the work force you won’t be able to.

 

When an employee asks for a raise or even when they don’t but you are assessing comp structures internally you need to ask a number of questions.

 

  1. How easy is it for this person to find alternative employment? Essentially how “Candidate driven” is their employment market?
  2. Should someone leave what would it cost to replace them immediately?
  3. What other hidden costs would/could be incurred over time with the transition?

 

The answer to question one is changing daily. I have heard many talking about recession until quite recently when in reality the recession post credit crunch officially ended Q3/4 2009. That may be a fact however somehow it didn’t feel like it did it?? Some sectors like Engineering and regulatory areas of Financial Services picked up quickly but many sectors remained subdued. More recently however the acceleration in demand for talent is more widespread. If you or your staff are in those sectors, you’re going to feel wanted. Maybe the best assessment is to ask yourself, if I’m struggling to find new guys for my team then so is my competition.

 

The second question is pretty simply answered. You’re going to have to pay at least market rate or almost certainly above to replace your leaver with talent from another firm. Or why would they leave to join you? Additionally you will need to pay a fee if you use third party search help or employ internal resources that do have a cost, as well as the cost of your own time interviewing etc.

Point three is often missed but is probably the most important. There is a cost of training your new staff, a cost of onboarding, an almost certain slowing of output/performance during this early phase and also potential loss of client income/relationships if the individual held a revenue producing or Account Management position. Finally remember, attrition breeds attrition, start the revolving door and it can be tough to stop it.

Suddenly, paying your staff market rate doesn’t seem such a bad thing?

 

2014 ends with very strong consumer confidence figures and an outstanding US GDP number for Q3. Unemployment has dropped all year and some exceptional job creation numbers have been seen of late. People are less worried about just keeping their jobs. These past few years haven’t been a recession as I said, but it has felt it and this has dissuaded a lot of people from pushing for raises and driving their compensation and careers. They have been scared to ask and scared to move and have “settled”. Corporate profits however have risen. I believe 2015 will see many individuals assessing where they are in their career and deciding not to settle in the more confident environment. They will be looking internally but also externally to reposition themselves on the compensation and seniority ladder. So when your staff come ask for a pay rise, best ask yourself the three questions and react accordingly. Better still, don’t wait for the request or worse the resignation, assess your market and get your comp and benefits up to a level where the call regarding the new role is declined or the advertisement is not applied to. Failure to do this could see your budget sheet see the worst type of move, costs up significantly and revenue down.

 

 

David Martin, Managing Director at Morgan Philips Executive Search Boston

 

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