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EMPLOYEE ANNUAL WAGE INCREASES

Danger Zone: Wage Burden Cannot Be Met

Wagestoo high,proftsdown,workerslaid o

Harry Franzheiman HR/OD Practitioner forover 30 yearshas published this newsletter to bring

you careful insight into reducing costs andunlocking employee potential.

Money is not a good long-termmotivator, but it can be prettyeffective over the short term. In

fact, Herzberg concluded about salary (i.e.,money, earnings, etc.):Viewed within thecontext of the sequences of events, salaryas a factor belongs more in the group thatdenes the job situation and is primarilya dissatiser.Annual increases to base

wages is the worst way to motivate a

workforce and likely the fastest way to dragdown prots. Your pay strategy is yoursingle greatest opportunity to reduce costs,increase productivity, and retain top talent.Done correctly, the pay system can engageemployees to think like business owners.

Companies that give employees yearlysalary increases will soon nd that laborcosts have skyrocketed. Annual increasesare like annuitiesthey cause labor coststo grow exponentially without anythingin return to offset them. Often companies

will hand out the annual increases untilthe weight of the salary structure is too bigof a burden and layoffs will be required.

And you know whom companies targetfor layoffs? Yep, thats correct; the higher-paid employees because you get more costreduction per laid-off head.

Of course you have to have a competitivewage structure and employees need to haveenough money to make a decent living,

but the annual salary bump is a road to ruinand a relic from the past. What if there werea simple system to install, maintain, and

explain to employees that provided for acompetitive income and that created a woratmosphere where employees felt they wepart owners? There is such a system and woutline the components in this issue.

But rst, there is a term you should knowTotal Compensation. Total compensatiois the whole package of salary, bonuses,rewards, and benets to an employee.Insurance, paid time off, holidays, rewards,

events all cost the employer and arepart of the Total Compensation package.Employers will design their total compensation system in a way that will allow themto attract and retain the talent needed toaccomplish the business objectives.Our Pay Strategy / Four Components

A better pay strategy includes:1)basewage,2)health and welfare benets, 3) aretirement plan, and 4) a quarterly protshare or gain share program. On the following page is a description of each.

Motivated, Not Entitled, Employees

A T I S S U E

C O N T I N U E D P A

W I N T E R 2 0

Giving employees an automatic annual pay increase sounds like the ticket for keeping everyone motivated andhappy. In fact, the opposite is usually true. There are better pay strategies to consider.

The Myth:89 percent o employers believe thaemployees leave because o money.

The Reality:88 percent o employees leavebecause o things other than money.

Top 5 Reasons Employees Quit:1. Limited career opportunities2. Lack o respect3. Money4. Lack o interesting/challenging job duties5. Lack o leadership rom supervisor

Originally published on Manpower Groups Employment Blawg.

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The only goal for the pay system is to at-tract and retain the right employees. Thatsit, period. Pay is not used to motivate or

to punish; its sole purpose is to attract andretain. With that in mind, the prevailingmarket wage for any employee is equal tothe amount of money you have to pay atthe point of hire. Once on board, the base

wage stays where it is for at least four yearsor unless the nature of the employees jobfunction changes. If the employee takes onadditional responsibilities, the base wagecan be adjusted upward. If the employeetakes on fewer responsibilities, the base

wage can be adjusted downward. But if theemployee simply does the same job func-tion year after year (even if they get reallygood at it), then the base wage should staythe same for four years. At some point you

will want to conduct a quick salary surveyto see if the base wage is too low and if thetotal compensation package has slipped toa point where the employee could nd abetter paying job doing the same thing foranother employer.

Employee health and welfare benetsare the fastest growing expense for everycompany that offers them. Why do we offerthis to our employees? So that they can behealthy and come to work more often?Hardly! Its because our competition does,and if we want to attract and retain the rightemployees, we need to offer it. The cost of

insurance is huge and getting bigger. Somuch so that employers are now sharingthe premiums and devising clever ways toget out from under the weight with co-pays,deductibles, co-insurance This cost shiftis eroding the total compensation packageas employees may actually take home lesspay each year because of the rate of increasedcosts and the amount of cost shifting.

We recommend that the insurance pack-

age be designed and structured so that theemployee has reasonable deductibles (nomore than $500), reasonable co-pays ($20),and a buffer from big costs with a 10% costshare of services and co-insurance and out-of-pocket maximums. Dental, vision, and Rxplans are important as well. Health and wel-fare benets are of value only when needed.

An employee who is not a user will not likelyappreciate this part of the total compensa-tion package. We also recommend using aSection 125plan, which allows the amountof the premium the employee pays to comeout before payroll taxes.

These are fairly simple to install andto maintain and can really sweeten thepackage, especially when the employermatches some (or all) of what the employee

contributes. Because employees can havecontributions deducted automatically fromtheir paycheck, their contribution is seldomseen and banking the money is not aspainful as writing a check. Contributions tothese plans also lower the taxable income tothe employee. It doesnt take much for thenest egg to grow and they get a good feelingknowing that they are saving for their future.

New Era HR Solutions is a locally owned, privately heldstafng and HR consulting company with the missiono creating sustainable employment opportunities orour employees by improving the business perormanceo our clients.

New Era HR can help you fnd, harness, and sustainthe talent you need to grow your business. We oertraining and development services and on-site coach-ing or leaders at all levels o the organization.

For more inormation about New Era, go to our Webpage www.NewEraHRsolutions.com and click on ourblog to learn even more.

903 East Main Street, Suite 103Auburn, Washington 98002

T: 253.887.0746

W:NewEraHRsolutions.com

Harry C. Franzheimhranzheim@newerahrsolutions.com

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linkedin.com/in/hcranzheim

acebook.com/pages/New-Era-Stafng-and-HR-Solutions /162313050459215

Volume 4, Issue 12, 2013

N e w E r a H R / W i n t e r 2013

Here is where we provide the opportu-nity for employees to act like owners. Theidea behind either a prot share or a gain

share program is to provide a bonus foremployees for the achievement of reachingsome business target(s). In a prot shareprogram the target is prot. We structurthe program to include the top line and theportion of the expenses that employeeshave some reasonable control over. In again share program there may be severaltargets like safety, quality, and productivityeach with clear denitions, dollarized andmeasured. As results are achieved and pasthe agreed hurdle, then the gain sharepool begins to grow.

Splitting up the pool or the protsshould be done quarterly; monthly makestoo much work and yearly is too long. Therare two methods to split the pool: 1)equalshare (pool /head count) means everyonegets exactly the same amount, and 2) per-centage (pool/wages) means that those thamake more money get a bigger bonus. Welike the second method!

Carefully Designed and EffectiveEmployer pay systems should be care-

fully designed to attract and retain talent.Annual salary increases done automati-cally, just for showing up for one more yeaof service, is nuts. I have heard employeessay, I have been here four years and I ammaking the same as when I startedwhein fact they have been at the company one

year, four times! In other words, stand-ing still does not merit more pay. Properlydesigned systems can keep a company frogoing broke and can help to unlock thepotential of any workforce. ne

$BASE WAGES

HEALTH &WELFAREBENEFITS

RETIREMENTPLANS

PROFITSHARE ORGAIN SHAREPROGRAM