PUT YOUR PAYROLL ON A DIET! For many business owners, payroll is the single highest expense on your income statement. Even businesses that have higher single costs (such as inventory), payroll is always significant.
Often times, we simply accept this expense as a cost of doing business. To a large extent, that’s true. However, time and again, business owners compound their own challenges by adding unnecessary “fat” to their payroll.
For example, are you paying any of your people more than you should for the responsibilities they have? In other words, do you have people in certain positions earning more than that position warrants?
Here’s what happens: As people extend their tenure at our companies, we reward them with pay-raises. Many get a pay-raise every single year. If people stay in the same position too long, you’ll eventually end up paying much more than the position warrants, causing “fat” in your payroll. In addition to putting your company at a competitive disadvantage, you’re simultaneously putting those people in danger. In tough economic times or during dips in your business, you’ll be forced to look at people’s wages and the people who are receiving more than they should will be the first to get canned or have pay-cuts forced on them. Either would be a nightmare come-true for most people. With proper planning, this “nightmare” is completely avoidable!
Here’s a tip: Make a pay-scale for every position in your company. The lowest in the range is for the less experienced, new-hires. The maximum is the ceiling anyone in that position can earn as base pay. Any additional money paid to employees receiving the maximum for their position will be paid in the form of annual bonuses (or Quarterly or monthly, if you prefer). By providing bonus opportunities instead of pay-raises, your labor costs become more variable than if you simply give pay-raises each year. If times get tough, you can back off on the bonuses without having to give a pay-cut. If a seasoned employee has an off-year, you won’t have to pay an extraordinarily high rate that is based on longevity and/or past greatness.
Remember, people typically live to their means. They generally don’t count on a bonus check to cover their monthly living expenses. But they do count on their base-pay. If they don’t earn a bonus, they may be disappointed. But if you cut their pay, they may not be able to afford their necessities and they’ll most certainly be furious with you.
If you structure pay appropriately, your company has a competitive advantage and your employees are protected. Therefore, your first action step in getting your payroll under control is to create pay-scales for each position in your company.
Once that’s done, you may realize you have a person (or people) already earning more than the ceiling that’s appropriate for that position. My suggestion is to bite the bullet. As stated, pay-cuts cause anger and hardship. Instead, simply let that person (or people) know that they are currently earning more than the maximum in their job. Let them know that all future additional earnings will come in the form of bonus opportunities. Also, be sure to tell them the reasons for this (you’re protecting the business and protecting him / her from future instability).
Here’s another question to help you identify payroll fat: Do you differentiate when giving pay-raises? In other words, does everyone in the same or similar positions get the same amount of pay-raise each year, or do some people get more than others because their results are better? I’m hoping your answer is that pay-raises are given based strictly on performance, yet I’ve seen over and again that many business owners sprinkle pay-raises equally among their team like snowflakes on a field. If you’re an across-the-board, equal pay-raise type of person, there is little doubt you’re intentions are good and you’re doing this in the spirit of “fairness,” but the fact is, this is unfair and not good for you, your employees, or your business.
People shouldn’t be rewarded simply for showing up. They should be compensated according to the individual results each person brings to the company. When pay-raises are distributed equally, the stronger players on your team will rightfully be frustrated that their individual, exceptional results are not being acknowledged. Likewise, you’re robbing your weaker players of incentive to become better. Think back to high-school; How would you have felt if you studied hard and sacrificed in order to earn high grades, but the teacher decided that everyone in the class was going to get an A+ no matter their test scores or homework completion? Would this motivate you to keep studying hard? Of course not! So don’t do this now. Don’t give pay-raises equally. Reward the best people with the highest raises or bonuses.
Here’s another simple truth that we sometimes overlook: People are not entitled to receive pay-raises each year. Yes, you want to reward and retain your great people who bring you the best results and annual pay-raises are one way to accomplish that. But the flipping of pages on a calendar does not signify an obligation to give pay-raises to everyone.
Many people, including business owners, believe that annual pay-raises are necessary. Again, their reasons for this are noble- they think that people should be rewarded for the amount of time they’ve worked for their employer. But ask yourself this: Would your customers pay you more for your product or service simply because they’ve been your customer for several years? Would you be okay if one of your vendors charged you more than they charge other customers because you’ve been their customer for a long time? Then why would you reward an employee simply for being in the job for a long time?
My opinion is that if you’ve had an employee for a long-time that hasn’t earned an increase in compensation based on his or her individual results, then a pay-raise is the last thing you should be giving. Don’t give them an extra penny. Instead, provide that person additional training, a candid performance review with specific action steps for improvement, realistic goals, and some coaching. Then hold him/her accountable for the results.
The point is; pay raises and bonuses should never just be given. They should be earned.
Here’s another tip to help you keep your payroll from getting fat: You don’t always have to throw money at people in order to show your appreciation for their hard work and solid results. Sometimes, just saying “thank you” is enough! Thanking someone in private will be meaningful and appreciated, but if you thank a person in front of his/her peers, it may even have more power.
Thoughtful and specific, handwritten thank you notes get saved! Why are they saved? Because they’re meaningful to the recipient! Don’t underestimate the power of a “thank you.” Many surveys show that the number one complaint people have about their work is not related to their compensation. Instead, it is that nobody thanked them or recognized them for a job well-done. I’m guessing you already know this, though. But are you really taking time regularly to thank the folks on your team that deserve it?
There are many other ways to show your appreciation that are less-expensive than larger cash bonuses: Plaques, trophies, gift-certificates, bonus paid days-off, a parking spot, a dress-down day…the list is as long as your mind is creative. Please don’t get me wrong: These less expensive tokens of appreciation should not substitute financial compensation. People should receive additional money as their performance and results improve. I’m simply suggesting that you mix in some other forms of recognition that may be equally (or more) appreciated by the recipient while also being less costly to you.
When is the last time you looked into reducing your workers compensation insurance? I’ll keep this short and sweet: Just look into it! You may find meaningful savings.
One last quick tip: If you offer health insurance for your team members, you probably competitively shop this each year and you probably have looked into all the different options available to you. If you haven’t, you need to. I’m not suggesting you cut benefits; I’m simply suggesting you make sure you know all your options.
Are you using an employee leasing company to employ your people? There certainly are benefits to some companies in outsourcing employment, but you need to beware! Some leasing companies (many, in fact) charge you workers compensation rates and other costs that you presume are pass-through costs based on the actual amount the employee leasing company pays on your behalf. Many times, that’s simply not true! These may just be additional profit centers that the leasing company benefits from at your expense.
I am not discouraging anyone from utilizing employee leasing and I am not making an across the board claim that all leasing companies follow that practice. I’m simply stating that I know it happens and I’m suggesting you have a competitor (i.e. a payroll processing company or an HR consulting company) conduct an audit for you. It won’t cost you much, but could save you plenty! Again, I just want you to explore your options and make the decision that provides you the greatest return on investment with all things being considered.
Remember, every dollar you can reduce in overhead directly impacts your company’s bottom line: profits. “Labor” often accounts for an overwhelmingly significant portion of that overhead. If you can reduce that by even one percentage point, how much additional profit would you realize?
It will take time, effort, and attention to every detail. You’ll have to make some gut calls and maybe even make unpopular decisions. But the return on investment could be substantial.
Review / Action Steps
- Please work with your executive team to create pay scales for each position you employ. You should determine the entry-level pay rate for each position, and a corresponding maximum pay-level. There are companies (i.e. employment agencies, HR consulting companies, etc.) that can provide database resources in assisting you to determine these different pay-levels if you want outside help.
- Please work with your executive team to determine how and when to give pay-raises. Pay-raises should be merit-based and subjective (not standard among everyone). I encourage you to create a new standard operating procedure that “pay-raises will never be given during employee reviews.” Instead, give pay-raises when they’re warranted and keep the discussions during reviews to things that are going well, ways that individual can improve, and how the leadership team may be able to provide better support to the employee being reviewed. If you keep the issue of “pay” in performance reviews, just be aware that the person you’re talking to may not be fully engaged in what you’re saying because they’re too occupied speculating “how much” they’re going to get in their pay-raise.
- Please work with your executive team to make sure you’re using techniques -other than money- to recognize or thank your employees for going above and beyond. Yes, the money is great and it needs to be there, but other forms of recognition are often times more appreciated by the recipient. If you’ve read White Paper 11- The Great Huddle, then you already know about the importance of “awards” in your company.
- Review your workers compensation: If you haven’t reviewed your workers compensation insurance in a while, it may be worth the investment of time in doing this. If you can reduce your workers compensation insurance, you’ll save money every single month- perhaps a significant amount of money! A good insurance agent can help guide you through this process and it won’t cost you a dime to research it.
- Review your current health insurance benefits: As you know, the cost of health insurance has skyrocketed in recent years. If you haven’t reviewed “other options” relative to health insurance plans within the past year, you really need to. Call in a couple different insurance salespeople, let them know what you’re trying to accomplish (i.e. reduce costs), and ask them to give you their best suggestions on what you should do. Then, choose the idea you like the best and go with it!
One of the first places to look to reduce costs is in your labor expenses. Labor costs are often times the bulk of your corporate overhead. A slight reduction in your labor percentage can have a significant, favorable effect on your bottom line profits.
Your people will make or break your business. You need to reward them for their efforts and treat them fairly. The point of the white paper is to make sure your compensation system is truly fair to everyone. Across the board pay-raises aren’t fair to your top producers. Giving pay-raises simply because someone has worked at your company for another year is not necessarily fair to you. Allowing someone’s pay to become out of line with her position sets her up for future pay-cuts or termination; that’s not fair to that person. It’s important that you constantly recognize and reward people when goals are met or expectations are exceeded. But we have to remember that there are plenty of thoughtful, meaningful ways to thank people without simply throwing money at them; although the money does need to be there.
There are several other costs related to labor that may get out of line over time; we reviewed a couple of them. You very well may qualify for a different tier for your workers comp premiums; this could save your company a lot of money. Over the years, health insurance carriers have become creative in their product offerings to allow employers more flexibility and options in their health insurance coverage for their employees. It’s absolutely worth looking into again if you haven’t looked at it in the past one or two years.
With the strategies and action steps presented in the white paper, you can set your company up for significant profitability increases. But please don’t forget the biggest area of labor waste that was not mentioned in the white paper: Employing people that simply aren’t needed.
Everyone knows that, but when is the last time you took a hard look at everyone’s roles and responsibilities and compared it to how much it’s costing your company? Can you get the same job done with one less person? If so, the entire cost of employing that person (salary, taxes, benefits, workers comp insurance, etc.) can be saved and will flow directly to your bottom line- dollar for dollar!
Have you hired additional people to compensate for the weaknesses of others that should be doing that work, but for whatever reason can’t or won’t? If so, you’re killing your profits. You have to make sure you get the right people in the right jobs. Otherwise, you’ll be creating and recreating job descriptions based on your existing team members’ talents and/or desires and this could be causing you to be over-staffed.
The white paper in this chapter was not intended to be the end-all for reducing labor costs. It was simply meant to get you thinking about some specific things and taking a couple deliberate actions to see how much you can reduce those costs. I strongly suggest you take more time to work on this with your leadership teams back at your businesses. Look every expense related to labor and question every one of them. It’s highly likely you’ll find money being wasted. I’ve literally seen companies double their annual net profits by paying closer attention to their labor expenses. It’s that important!
Like everything, it’s not easy and it will take time and focus. But you and your leadership team can do it and the rewards can be well worth the effort.
I wish you all the best!
Copyright 2013 by Jon Denney