How do employee pay demands affect business finance and how can you achieve happy, contented staff without having to pay through the nose to get it? We take a look at the issues affecting employers when confronted by employee wage demands and what you can do to put yourself in the best position to address them.
Setting Employee Salaries
Receiving increased wage demands from employees can be a delicate balancing act. On the one hand you risk paying them too little and losing talent to competitors, and on the other you risk paying them too much and crippling the finances of your business.
Having the ability to set salaries correctly from the start is a benefit new businesses can control, and it can help align your business finances to cope with increases in the future, as well as ensuring that you are within industry-standard tolerances. If your cash flow is healthy and your finances are good, then you may consider paying above industry standard in order to attract the very best talent, but that still leaves you with the same increased employee wage demands in the future.
Most business owners want to attract good talent and pay them fairly. But how can you set salaries that reflect the best-of-both-worlds scenario?
Determining the relative value of each employee
Ask yourself, 'how much value or revenue is each employee likely to bring in?' This should be the uppermost of what you can pay that employee.
For a sales person tasked with generating revenue with a profit of £250,000 per year, you might well be looking at paying them £50,000 + commission and benefits.
But the same formula might not be used for admin or support staff. Perhaps they don't make money, but they will save you some. Working out how much they can save your business is the key to working out their relative and fair salary expectations. It can certainly help you figure out the most amount of money their position is actually worth.
Finding common ground in salary expectations
There are many ways you can set about establishing either the market rate for that position or the least you are willing to pay them. Taking a look at similar jobs from online job-sites is one, and discussing employee wages amongst your networking meet-ups is another.
The chances are you won't be willing to pay top-rate for candidates, but you probably won't want to pay the minimum either, because as the saying goes 'when you pay someone peanuts...'. It is highly likely that you will be looking at a salary somewhere in between, where you are more likely to find the best talent, willing to work for a mutually commensurate salary that fits in with your business finance projections and budget.
Wages vs Job Benefits
Your financial plan might be adept enough to account for both employee wages and the costs of hiring additional staff to your company, but how will the inclusion of job benefits affect your business finance?
One of the biggest changes to the economy since the recession has been pay freezes and the rise of employee benefits in lieu of salary-hiking. The Institute of Directors looked at pay conditions and expectations and their respondents reported:
- 2 out of every 3 businesses are paying cash bonuses
- 1 in 5 companies offer share options
- 50% believe that rises in pay had the biggest 'positive effect' on employees.
That last statistic is interesting, only 50% believed that increasing employee wages was a positive move for employees!
So pay is important, but there are other factors at play when it comes to negotiating employee wages and discussing benefits, and one of those reasons might well be empowering employees to align their goals and objectives with those of the business they are working within.
This isn't anything new, but it's worth re-stating, the CIPD conducted a report discussing the business benefits of employee happiness, mental health and business improvement. The HR & Employee Engagement Community concludes in their findings that 'employee engagement is essential to long term business success'.
Companies like Google, Innocent, and HubSpot all recognise that finding common ground between business goals and employee objectives generates happier, more contented employees and increased business success when both philosophical and ethical aims are aligned.
Preparing For Employee Pay Rise Requests
When an employee enters into negotiations requesting a pay rise, most employers will not be asking "I wonder what the employee is thinking?" They are more likely to be trying to work out how they can avoid paying anything extra out of their business finance in order to keep them.
Here are 5 ways you can deal with that employee pay rise request:
Treat pay rise requests seriously
Despite your initial reaction to say no, you won't gain anything from doing so. You should always be able to fall back on the default answer of having to check with HR or look at your finance budget first.
Most employees see their salary as the representation of how how much they are valued by the company,and if they feel they aren't being paid enough, you should be taking their concerns seriously, and looking into why they feel the need to raise it.
Always hear them out and be ready to explain and outline any parameters that are required for that employee to earn the amount they are asking for.
Acknowledge the situation
Your employee will have been thinking about this for a while and have come up with a long list of 'grudges and grievances' before asking for a pay rise, so ensure you treat them with a certain level of compassion or understanding.
This is where regular performance reviews can help both employer and employee assess the merits and timescales for pay reviews. If you already have them in place, you and the employee have the opportunity to address any issues and put into practice any KPIs that might indicate a guarantee bonus or pay increase at a set time in the near future.
Be aware of industry standards
As outlined above, industry standards are standard for a reason. They are a comparison of similar positions within the industry and what an employee can expect to earn at either a competitor or in a similar position elsewhere.
An employee's performance is what matters most during pay rise requests, not what they expect to do in the future. Unless you are giving them greater responsibility or putting additional work into their job description, you can only consider pay rises if they have achieved their goals and objectives from previous performance reviews or have been outstanding in their role during the past 6-12 months. You should also be aware when you have rewarded other employees in similar roles with pay increases too.
You might also look to consider non-monetary rewards instead. This might include more flexible hours, working from home, target-based rewards, further training opportunities or additional holiday allowance.
Financial Implications of Employee Pay Rises
The biggest impact by far on your decision to grant (or not) pay rises to employees is the financial implications to your business finance. For some companies you either have the cash flow or capital to do so or you do not and the are some significant financial implications of granting pay rises.
Obviously the more you pay an employee, the higher your tax bill will be. Even offering non-monetary benefits like training or gift-rewards, will present a significant cost to the business, especially if you employee twenty or more staff.
The current economic conditions are also conspiring to make the cost of employment increase for employers in the UK. The fall in the value of the pound, real-living wages and the cost of living are all down and any increase will undoubtedly be felt first by employers and this will negatively impact the strength of their business finance decisions.
But employers should at least be beware that the implications for their business finance might soon get even more strained as annual performance reviews and annual pay reviews are slowly being replaced by more frequent performance reviews and shorter-term targets that are going to increase the demand for similar salary and pay reviews too.
Does Your Business Finance Make Allowance For Increased Employee Pay?
If you are at the start of your business then you have an opportunity to establish and set the parameters for employee pay scales and wages setting. This is critical to the longer-term health of your business finances and can set out a clear budget for adding or reducing staff in the future.
However there are going to be times when employee roles change and when employees become disgruntled with their current salary. This is where consistent pay and performance reviews can maintain the alignment between business goals and employee objectives and introducing KPIs and rewards ensure that a business succeeds without having to finance expensive employee salary increases without a clear benefit to the business.
Getting this right can be the difference between experiencing severe business finance strains when dealing with employee pay rises and establishing a happy, contented workforce having personal objectives clearly aligned with business success.