The CFO'S Perspective

Developing Appropriate Salary Raise Levels for Your Business


A CFO is responsible for budgeting and accurate cash flow projections. While not necessarily an HR expert, the matter of salaries and raises is an area that a CFO must navigate in collaboration with the company’s HR team. We are sharing our thoughts on this area from a CFO’s perspective.

Wondering what the appropriate raise levels should be for your staff this year? Before the new Tax Cuts and Jobs Act of 2017 was even a reality, many private U.S. companies had intentions of increasing employee salaries in 2018. A recent Q1 2018 Trendsetter Barometer report from Consultancy PwC surveyed CEOs and CFOs of 300 private companies with an average of 934 employees.

The findings are bullish on two fronts. First, on average these companies expect to raise wages by 4.27 percent over the next year, which is a significant boost over the anticipated 2 percent raises a year prior. Second, 56 percent of private companies expect to hire workers over the next 12 months, up from 47 percent in the prior period.

What do these results mean for your company? They may not mean much if you have other business drivers that impact your salary decisions. On the other hand, knowing what the rest of the field is planning for the coming year is vital if you want to remain competitive with your staff and hope to attract the best talent.

Salary is both a regional and industry-specific matter. One of the new issues that companies must contend with is the potential changes in the law for salary exempt employees. Companies in the PNW must also look at the ways that their economies stack up against that of the nation. These and other factors could impact your company's salary raise level choices now and when it's time to budget for the coming year.

The New Law for Salary Exempt Employees

In 2016, the U.S. Department of Labor threw a wrench into the cogs of many of this nation's businesses with a new law that makes millions of exempt workers non-exempt. Specifically, the law changes the salary threshold for overtime, so that some salaried workers who are working beyond 40 hours per week would have to be paid overtime. That new threshold is $913 per week, or $47,476 annually, up substantially from $455 per week or $23,660 annually under prior rules. That threshold is also set to automatically increase every three years to account for wage growth, with the first increase scheduled for Jan. 1, 2020.

Unfortunately, those changes are also in limbo thanks to a slew of challenges filed across the country by various business groups. Presently, the DOL updates are on hold, so a business can revert to the former $455 per week threshold if it wishes. Current Labor Secretary Alexander Acosta has indicated that there will be changes this year (by October), but the threshold will be considerably lower than the 2016 proposal.

Even if your company doesn't make the jump to adhere to the updated DOL rules, which aren't in effect, you will still have to comply with your state's labor law changes. For example, effective Jan. 1, 2018 in Washington, the minimum wage is set at $11.50 per hour, and a commissioned employee's regular pay rate must exceed one and a half times the state minimum wage. Oregon sets a minimum wage as well as minimum salaries for administrative, professional, and executive exempt positions that change each July 1. These minimums vary depending on location.

What Has Happened to the Labor Supply in the Pacific Northwest?

Overall, the unemployment situation in much of the PNW looks more positive than that of the rest of the nation. In January 2018, employment remained at 4.1 percent nationwide. This was an improvement over the 4.8 percent figure from a year earlier.

While Washington's total unemployment rate still stands at 4.7 percent, it has improved drastically from the 5.5 percent two years ago and 6.5 percent four years ago. In certain areas and industries, it is much lower than the state and national average. For example, in the Seattle/Bellevue/Everett area, unemployment is at just 3.9 percent. On a seasonally-adjusted basis, Washington added 6,800 jobs in January over the level a year prior.

Oregon is looking even better starting out the year. Its unemployment rate in January was just 4.1 percent, while sixteen of the state's counties had unemployment rates below the national average. For example, the Portland area's unemployment rate remains below 4 percent (3.8 percent) for the third consecutive period. The state added 5,000 jobs in January in major industries such as construction, private educational services, and manufacturing.

Since the demand for labor exceeds the supply in some areas, businesses are left with a dilemma. Is it a better choice to get into wage bidding wars with competitors for new help? Or, is it time to raise the company's base salary as a defensive measure to prevent having staff poached? These are complex issues that may not have simple answers.

Finding the Appropriate Salary Raise Levels for Your Business

If your company wants to attract and retain the best employees, it should have a process in place for determining salary increases. Salary may be a touchy subject for employers, current staff, and potential hires, but it's essential to your business' success, particularly in this job market. Not only does your organization want to have a pay scale to reference when hiring and completing evaluations, but also be able to explain how these numbers are determined.

If you're wondering about the best way to determine appropriate salary raise levels for your company, you're not alone. This is a frequent source of headaches. The assumption is that you already have clear research on each of your company's positions that includes a median pay and a range for a maximum and minimum. These are things that should be frequently updated to reflect changing market conditions. Your firm's annual raises will move people's salary up within these established ranges.

When you review your company's budget and decide on salary raise levels, you have the choice between several approaches. Which one you choose may depend on your industry, your location, and your desire to maintain or satisfy current staff. The methods you can choose include:

  • Equitable Raises. One of the simplest ways that you can give employees salary increases is to give everyone the same percentage. This isn't done often because it rewards mediocrity, fails to reward greatness, and eventually creates massive inequality among workers who begin with higher salaries.

  • Base Wage Adjustments. Provided you live in a competitive market or industry, making frequent adjustments (i.e.- increases) to your base wage is the best way to retain and attract the most talented employees. This requires that you have someone in your human resources department or a trusted financial consultant in your corner who can deliver these vital updates.

  • Performance-Linked Raises. If you are like a majority of companies, your business links pay with performance. An employee often meets with their manager several times per year to set goals, review progress, and receive an evaluation of their performance. Their annual raise is then based on that performance rating.

  • A Hybrid Program. Your company can combine several of these programs to create one that is suitable to its market and location. An example would be to adjust base wages periodically but still give annual performance-based salary adjustments as incentives.

Based on your company's budget for the coming year, you can make any of these salary raise programs work. Let's assume you want to give performance-based raises, and you have budgeted $200,000 for these increases.

Your first step is to review the prior year's evaluations, if available, to determine the median rating among your employees. This would be where your base raise will lie, assuming 60 percent at this "average" level, 20 percent "above average,” 10 percent "outstanding," and 5 percent each at "below average" and "unsatisfactory." Raises might be distributed in a range of 0 percent to 6 percent, with most in the 3.5 to 4.0 percent range at the median.

How Are Other Companies Addressing Salary Issues?

The way that other organizations address salary issues vary, but it seems that the companies with the highest employee satisfaction rates also have some of the best compensation packages. Take Washington-based Costco for example. The company was named by Indeed as having the most satisfied employees when it comes to compensation and benefits.

Even when retail is struggling throughout the country, Costco continues to prosper. The company is known for paying its employees well above minimum wage. In Washington, they began paying employees a minimum of $13.50 in 2016, when the state's minimum was $11.50, and the federal minimum was $7.25.

Other companies are responding to the Trump administration's sweeping tax cuts in a variety of ways. According to a report by The Washington Post, more companies are providing one-time cash bonuses, ranging from $150 to $3,000, to employees instead of long-term salary boosts. Firms including Walmart and Washington Trust Bancorp are increasing base pay and salaries instead or in addition to other bonuses.

Salary may be essential for your staff to pay their bills, but employees also value an overall compensation package that packs a punch. Another employer of note is Seattle-based Starbucks, who gives eligible employees full bachelor's degree tuition assistance to Arizona State University through its Starbucks College Achievement Plan.

Salary increases can be one of the toughest decisions that business owners and senior managers must make annually. These aren't one-sided decisions that are either all about the employees or completely focused on the company. In the end, there must some balance between keeping and attracting the best talent and protecting your bottom line results. The business drivers and other factors that impact your decision may change over time, so this is something that you will need to re-evaluate with a fresh set of eyes each year as budget time approaches.

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Topics: Economic Trends, HR, Budgeting

Topics: Economic Trends HR Budgeting