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Reasons to Give Employees a Pay Increase: The Bottom Line

Reasons to Give Employees a Pay Increase: The Bottom Line

Can pay increases for your employees help improve your company’s bottom line? Is there a connection between compensation and productivity?

In highly competitive business environments, these questions have pushed business owners to ask themselves whether they can afford to increase wages. We asked experts for answers, and some of their responses were surprising.

There are good reasons to give employees raises, such as retaining talented workers, improving employee morale, and stimulating innovation. But one big surprise is that raising hourly wages can actually be a formula for more profits.

First, do the profitability math

To determine if you can afford to raise pay and by how much, undertake a financial analysis, says business attorney Richard Trimber. He advises small to midsize clients on operational and growth matters. “Broadly speaking, it’s a math equation,” says Trimber. The key is to figure out if you can maintain your profit margin when you give employees raises.

Let’s say you make $100,000 in revenue a year and want to make a 10% net profit, or $10,000. To hit that $10,000 profit goal, you cannot spend more than $90,000 to bring in $100,000 in sales. Out of that $90,000 you will need to cover all of your costs, such as salaries, rent, utilities, interest expenses and taxes.

“You have to understand what all of those costs are,” says Trimber. “That will determine what you can afford to pay your labor and still make a 10% profit.”

If there’s no money left over to pay higher wages, it may be because you’re not charging customers enough to cover your overhead and are taking on some work at a loss. By taking on only the work you can do at a profit, you’ll have more money to pay your team competitive wages — and improve the staying power of your business.

“You have to have the discipline to say you’re not going to do anything if it’s not profitable,” Trimber says.

Consider the costs of paying your employees too little

Paying employees too little to cover their living expenses may be adding to your overhead in ways you haven’t calculated. For instance, if an employee calls in “sick” because he can’t afford the gas to get to work for the rest of the week, your business will lose out.

“Scrimping on wages usually brings with it a number of hidden costs including higher absenteeism, excessive turnover and customer issues,” says Tom Armour, co-founder of High Return Selection, which develops and trains recruiters in North America.

When Armour’s clients are considering reasons to give employees raises, he encourages them to look at several things, such as:

  • What’s spent to replace employees who have left
  • The cost of losing repeat customers who have become dissatisfied
  • The cost of fixing mistakes by workers who were not motivated

“That is big money to a business,” says Armour. When that money is redirected into pay increases for employees, he says, “that money not only offsets better wages, but it often offsets them five, 10 or many times over.”

Add up the potential productivity gains

If raising workers’ pay will enable you to bring on talent capable of adding to your revenue or streamlining your costs, the salary increase may pay for itself. One such example involved JMJ Phillip Group, an executive search firm.

The firm, which focuses on manufacturing and the supply chain, did some analysis on worker salaries, about 15 percent of whom were hourly workers, says Dennis Theodorou, vice president of operations. The results prompted the firm to raise hourly worker pay by about 25 percent. There was good reason to give employees raises, says Theodorou, because the market was “extremely competitive.”

At the same time that it bumped up worker pay, JMJ also raised expectations for their employees. When the company increased wages for existing employees, for instance, it often provided coaching and employee training.

The goal was to empower employees to make a stronger contribution to the company by improving its customer service and internal processes, says Theodorou. In hiring 10 to 15 people, the company also developed a multi-step process that provides added insight to a candidate’s character.

“We have definitely taken measures to avoid ‘settling’ in hiring,” says Theodorou. “We’ve been able to pay some extra money for those who are going to come in, really perform and be able to generate a little bit more revenue that will help us sustain the increased wage — and then some.”

As Theodorou has realized, while there are a number of positive benefits that come from giving workers a pay increase, doing so can often do more for your bottom line than keeping wages flat.

Use pay increases to boost your bottom line — and recruitment

In a competitive hiring market, increasing the pay of your employees can bolster profits and attract the kinds of workers who will deliver. But you won’t get too far if you don’t have an effective recruiting and retention strategy guiding the process. That’s where we can help. Connect with Monster today to see how your business can get free access to the latest expert recruiting insights and job market analysis so your company can find the best, most profitable workers.