The CFO'S Perspective

Planning for Next Year's Raises in Today's Competitive Business Environment

Planning-for-Next--Year's-Raises-in-Today's-Competitive-Business-Environment

With full nationwide employment, pricing pressure on materials, and generally modest revenue growth, how do you plan or budget raises for your employees? As you create next year's budgets and update your strategic plans, you also need to take several vital steps.

These include looking at the big picture, understanding and limiting your risk, getting help if you need it, and utilizing a financial planning tool to provide the right raises to retain and attract talent.  This may seem like a tall order, but a systematic approach will help your organization achieve its staffing and budget goals.

Why Do People Quit Their Jobs?

As a business leader, one of your primary goals should be to hire and retain the right people for key positions within your company. Despite your best efforts, there will still be some turnover within the organization. Do you ever wonder why those people are walking out the door?

While every situation is unique, some personnel losses are preventable. In other words, your company could have taken some sort of action to retain a valuable employee. It helps to understand some of the common reasons why people decide to leave their jobs. Among them are:

  • Being Underpaid. Employees are not likely to stick around for long if they determine that their compensation package is below the industry standard.
  • No Opportunity for Advancement. According to an extensive LinkedIn survey, the number one reason people leave jobs is that there is no room for advancement within the company.
  • Lack of Recognition. Employees want to feel that they are valued by an organization. If they don't, they might move to a company that will show them some appreciation.
  • No Work/Life Balance. Challenging work is fulfilling, but workers also yearn for more balance in their lives. If they are stressed or feel overworked, they will search out a place that promises more balance.

Those are just a few of the top reasons that people seek out and find positions elsewhere. There are many more. Others include being stuck with poor managers, a poor culture fit, no training and development opportunities, and the desire to be self-employed.

Your organization can address many of these objections, and a good start is by involving both management and staff in the conversation. Ask for volunteers to form collaborative teams to focus on some key areas such as:

  • Culture
  • Building internal teams
  • Transparency through communication
  • Rewards & Recognition

Should You Be Concerned About Turnover?

Now that you know some of the primary reasons that people leave their jobs, your company should evaluate whether it should be concerned about turnover rates. So, what is considered "normal" in today's market?

According to the latest figures from the Bureau of Labor Statistics, the overall "Quit Rate" in the U.S. as of May 2018 is now up to 2.4%. Regionally, it is also 2.4% in the West. This is a seasonally-adjusted rate that accounts for the total number of "quits" during the entire month as a percentage of total employment.

Broken down by industry, some of the highest turnovers take place in Leisure and Hospitality, Retail Trade, and Mining & Logging. Lower turnover is found in the Government and Financial sectors.

These figures are certainly cause for concern if you are an employer. Essentially, Americans are now quitting their jobs at the highest rates since 2001. Now that the unemployment rate is at its lowest level in living memory, employees feel safer leaving a position to pursue another one that might offer a better combination of pay, benefits, and opportunity.

Also, in May, roughly 5.75 million new people were hired, which is the largest gain in hiring in 17 years. These movements are creating pressure on employers to raise wages, either to retain employees or attract new ones after some have jumped ship.

Unfortunately, those same employers are facing margin pressure due to the soaring costs of raw materials, coupled with relatively stable end-user pricing. When a small to medium-sized company doesn't have the market power to pass on significant price increases to consumers, this presents a strategic dilemma.

Using the Regretted Turnover Rate to Target Raises so They Will Count the Most

The good news is that your company doesn't have to use your raw turnover rate in budgeting for raises for the next year. In fact, doing this would present you with a skewed figure that will not produce the optimum results.

Employee turnover is an often misunderstood and mismanaged figure. The truth is that not all employee turnover is "bad."   The departure of some low-performing employees might even be a positive for your organization!

Instead of worrying about your voluntary turnover rate, you should instead take a close look at your “regretted turnover rate”. This will ensure that you are assessing your true risk of losing valued employees and will help you calculate the "right" raises.

How do you figure out your regretted turnover rate? Simply put, identify the people that leave the company of their own accord for reasons related to compensation or other opportunities.

Let's assume that your company has 100 employees and 10 of them have left over the past year. Your raw turnover rate is 10%, but this doesn't tell the entire story.

  • 5 employees followed a spouse to a new location
  • 1 employee retired
  • 1 left to have children
  • 3 left to work for a competitor for pay or other reasons

The regretted turnover rate in this scenario is 3%. This figure should be a primary decision-making tool to aid with your organization’s budget allocations for raises in the next year.

Calculating the Regretted Turnover Rate is simple enough.

  • Who left in the past year?
  • Why did they leave?

Then consider:

  • With the “whys” in mind, examine your existing employees to discover who might leave that you would want to keep.  This is the size of the actual turnover risk you’ll need to manage. 
  • If you have limited resources, these key employees are where you want to invest in with the largest raises among your staff.

Other Considerations When Planning Next Year's Raises

These calculations are an important part of planning for the coming year, but it would be a mistake to leave out the human element. Experience shows that most business owners really want to do the right thing by their employees, providing pay and benefit packages that reward employees appropriately.  After all, happy employees usually translate to a more successful organization. 

Many top managers feel a sense of loyalty and gratitude toward their team and want to share their success, to the extent feasible. However, it isn't always possible to broadly fulfill that desire and still deliver a reasonable profit to the bottom line.

The current low unemployment rate could mean that it is going to take longer to replace the best employees that decide to leave for greener pastures. This could result in lower efficiency and productivity from your remaining employees.

Since other top performers are likely already working, you may have the added expense of paying a recruiter to find the right person for an open position. Between the cost of a recruiter and lost productivity, losing a key employee can cost your company as much as half of that employee's annual salary to replace them in a tight labor market.  There’s definitely a downside to not keeping up with pay standards in your industry.

Get Creative If Funds Are Too Tight for Target Raises

Business constraints may be such that you can't find the funds to offer significant across-the-board raises next year. If this is your reality, you will need to get creative to hold onto your most talented employees and attract new hires for any key openings.

First, see if there are any ways that you can expand your margins. This might be the ideal time to closely examine the profitability of your product or service mix and make some changes. Can you boost innovation and add value to your current products? Doing this might justify a much-needed price increase. You might also want to explore expanding your sales into new territories to increase revenue.

If those ideas aren't feasible or don't create enough room in your budget for material raises, use some other approaches. These include offering other perks to employees such as more paid time off and a better benefits package. You can also increase your employee recognition programs so that your staff feels that they are valued.

Regardless of the amount that you budget next year for raises, the risk of forgoing an increase in compensation is very real. Your business will experience increased turnover (other companies are looking to hire) and/or your top performers may be recruited away.

As you create next year’s budgets and update your strategic plans, be sure to calculate your Regretted Turnover Rate and use it as an aid to understand the risk of losing key employees and ensure the future success of your organization. This calculation and overall evaluation are ones that your CFO should be able to complete. If you need assistance in this area, whether as a project or with a part-time CFO, please contact us here.

About the Author

bill-palmerBill Palmer has experience with the finances of nonprofits from multiple perspectives.  For more than six years, he has acted as the Director of Finance & Operations at a private school where he has a broad range of responsibilities.  He is also the founding CFO of a non-profit focused on sustainable agriculture, food, and nutrition where he oversees the accounting staff and also advises the CEO in budgeting and long-range planning.   Bill also serves as Board Treasurer for a local charity focused on children’s health issues.  Previously, he helped found and served ten years on the governing board of a private school, where he built the business model, led the initial capital campaign which enabled the commencement of the school’s operations, negotiated long term loans, and set pricing policies.  

Topics: Planning HR Budgeting Salaries