No Sweat Compensation Planning
by Bill Collier
You’re sitting in your office, and like most
business owners, you’re up to your elbows in a variety of challenges and
opportunities. Suddenly, one of your employees appears at your door and
asks the dreaded question, “Since my anniversary date was two weeks ago,
am I due for a review and a raise?”
You buy some time by
telling the employee you plan to work on it within the next few days. But
you can’t help feeling guilty. First, you just lied because until you were
reminded, you had no idea that the review was due and had no intention of
addressing it. Second, you feel a sense of guilt because your lack of a
systemized approach to reviews and raises repeatedly ruins your schedule.
As if this wasn’t
enough, the next interruption is your accountant who brings the news that
salary expense is way over budget, ending with, “Oh, and by the way, we
just got our health insurance renewal. It’s going up 22% next year.”
Most small business
owners operate in exactly this fashion. The employee anniversary date, by
default, creates the expectation of a raise. (Reviews are generally
dreaded by all involved, but as part and parcel of an annual raise, they
go along for the ride.) Health insurance and other compensation-related
expense increases take us by surprise. We’re supposed to be in charge of
our companies, but we’re at the mercy of employees, vendors, and arbitrary
schedules.
It doesn’t have to be
this way.
How about a system that
lets you take charge of schedules, accurately budget for increases in
salaries and benefits (and actually stay within that budget), and
eliminates the constant stream of mid-year raises?
Sound too good to be
true? Read on.
First, who says that an
employee’s anniversary date has to trigger a review or a raise? I suggest
you do two things:
1. Perform
all the performance reviews in your company within a 2-3 month timeframe,
near the end of your fiscal year.
2. Schedule
all pay raises to kick in at the same time – the beginning of the new
fiscal year.
What does this do for
you? For one thing, it eliminates the constant stream of interruptions and
unplanned, hastily-prepared reviews (which hopefully equates to better,
more thoughtful reviews.) It also gives you the structure to proactively
look at your entire team and corresponding salary expense at one time, and
to take the time to budget this expense for the new year.
Yes, it can be a lot of
work. Yes, it requires plenty of discipline and organization. But in my
mind, the benefits outweighs the costs. You’ve got to do this work anyway,
right?
Here’s another change
to consider: Try to move your health insurance and other benefit renewals
to coincide with the start of your fiscal year. Then, by the time you’re
doing your annual planning and budgeting for the new year, you’ve got your
renewal quote in hand – ready to be plugged into your budget.
Finally, here’s the
biggie: Lump ALL of your compensation-related expenses and focus on that
number, and not just on the salary expense. Aim to keep this number
growing more slowly than revenue. Better yet, manage to keep it growing
more slowly than your gross profit. After all, that’s the number
that pays all your overhead expenses.
So, if in the past you
tried to have an average annual salary increase of 4%, consider
having an annual total compensation expense increase of 4%.
This way of thinking
requires some trade-offs. If health insurance is going up a bunch, it may
eat up some of the funds that would otherwise be available for raises.
This approach also
requires you to have some frank discussions and some educational sessions
with your employees. Most are probably unaware that you pay FICA, Medicare
and unemployment taxes. They may not know about your cost for their health
insurance, worker compensation insurance and other benefits. One way to
drive home the total cost to the company is to prepare a year-end summary
for each employee, detailing each compensation-related expense.
Eliminate the chaos and
take control. Spend some quality time once a year doing this admittedly
hard work, and the rest of the year you can focus on growing your
business.
Bill Collier is a St.
Louis-based business coach, consultant and speaker. He is the author of
the book “How to Succeed as a Small Business Owner … and Still Have a
Life.” His website is www.collierbiz.com, and his email is bill@collierbiz.com
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