Employee retention strategies remain a top concern with organizations as the labor market continues to improve. The competition for talent in an ever-tightening jobs landscape has fostered an open-minded sentiment among employees about job-hopping. Offering wage hikes to retain employees and increasing salaries to attract top talent can be an essential component to remain competitive. But prudent analysis and proactive planning are necessary to ensure smooth execution.
Determine and Assess Labor Cost Ratio
Organizations should first assess their current labor cost ratio (LCR) compared to industry averages to gain a general perspective on operating efficiencies and how much wiggle room is available for wage increases. Depending on the size of the business, LCRs may have wide divergences. LCR can be calculated by dividing annual payroll expenses by gross revenues multiplied by 100. Make sure that annual payroll expenses include all costs associated with employee compensation including gross salaries, vacation pay, health and life insurance, 401(k) and pension contributions, taxes, unemployment and disability insurance and any other benefits. For example, an organization with $2 million in annual payroll expenses and $8 million in annual revenues has a 25 percent LCR. Lower LCRs generally indicate more efficient operations.
Benchmark LCR to Industry Averages
LCRs vary by industry. As a general rule of thumb, automated industries like manufacturing and semiconductor plants and oil refineries tend to have lower LCRs compared to labor heavy industries like trucking, restaurants and hospitals. According to PwC, in 2015, the healthcare industry averaged 45.5 percent, utilities averaged 16.9 percent, financial services averaged 21.8 percent and manufacturing/engineering averaged 20.3 percent LCRs. The Bureau of Labor Statistics provides organizations a wealth of useful labor data to do comparisons with.
Identify Key Roles and Talent
If you find your business is operating below industry LCRs, then you'll have more wiggle room for wage and salary hikes. If you find your LCR is already at the high end or above industry averages, narrow the focus down to the most key roles and talent for salary increases. If business outlook is murky, then consider a cash bonus incentive for renewing employment contracts for key talent. Make sure to compare industry salaries to remain competitive. Generally, key talent should directly or indirectly generate a multiple of their compensation in revenues. Tying compensation to output is ideal for the organization but may be a strain for the employee, therefore raising the incentive based on productivity combined with a fixed salary raise can work best for both parties. Keep in mind that once salaries are raised, it can be very difficult to go back if business recedes. Therefore, it's crucial to weigh the pros and cons of this strategy.
Pros of Raising Salaries
Higher salaries can reduce employee turnaround, improve morale and galvanize loyalty, especially if salaries are at the high end of industry averages. Existing employees have already endured training and are acclimated to the operations. Keeping key talent long term can establish relationships and may promote loyalty, especially with competitive pension and profit-sharing programs.
Cons of Raising Salaries
Higher salaries naturally raise the LCR, unless tied directly to performance (revenue generation). Raising salaries for existing employees limits the capacity for new hires. While boosting wages for existing employees may result in a marginal productivity improvement, hiring new employees should be pure tangible revenue drivers.
Be aware that a higher LCR combined with falling revenues can be a recipe for disaster, so make sure that your business has the fiscal fortitude to accommodate wage hikes. Employee retention strategies are generally defensive in nature compared to hiring new talent to drive higher revenues on the offensive. Proper attention to both defense and offense can be essential to maintaining an effective world-class workforce.
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