No-Sweat Compensation Planning

by Bill Collier

You’re in your office, busy as usual. One of your employees appears at your door and asks, “Since my anniversary date was yesterday, am I due for a raise?”

The next surprise is your accountant, who tells you 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 28%.”

Most small-business owners operate in exactly this fashion. The employee anniversary date, by default, creates the expectation of a raise. 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 eliminate the constant stream of midyear raises?

Sound too good to be true? Read on.

First, who says an employee’s anniversary date has to trigger a review or a raise? Consider this:

1. Perform all the performance reviews in your company within a two- to three-month time frame, 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 the benefits outweigh 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, lump together all of your compensation-related expenses and focus on that number – not just on the salary expense. Aim to keep this number growing no faster than revenue. Better yet, manage to keep it growing no faster 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 approach requires you to have some frank discussions and some educational sessions with your employees. Most may be 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.

Eliminate the chaos and take control. Do this admittedly hard work once a year, and the rest of the year you can focus on growing your business.

Bill Collier is the St. Louis-area head coach for The Great Game of Business. He works with organizations that want to improve financial results, engage their employees and create a winning culture. Bill can be reached at 314-221-8558, GGOBSTL.com or bill@collierbiz.com.