In a job
market where there are currently more job openings than job seekers, it is
increasingly important for organizations to make efficient compensation
decisions. This means not paying your workforce too much, but also not paying
uncompetitive wages that cause key employees to look elsewhere.
Since labor is generally a company’s
largest expense, higher-than-necessary wages could affect company profitability
or result in higher prices for customers. In fact, labor typically represents greater
than 60% of total costs. Even overpaying
by a few percentage points could represent thousands of dollars in increased
expense. The chart to the right illustrates labor as a percentage of total
costs in the U.S. over approximately the last five decades.
At the
opposite end of the spectrum, paying wages that are below market can result in
high turnover. In our experience, it is often the top talent that leaves, since
those workers will likely have an easier time landing a new job. Conversely,
lower performers tend to remain, since their external job prospects are not as
good. Recruiting and training new employees can be very costly, not to mention
the loss of knowledge that occurs with the departure of experienced and/or high-performing
workers. No company wants to become a training ground for its competitors.
Since there
can be significant costs associated with paying too high or too low,
organizations should take appropriate steps to benchmark their pay systems to
the external market. Using valid compensation data and having a well-designed
framework to manage pay are the best ways to ensure that your company can
manage labor costs efficiently. We would recommend that you review your pay
system annually, especially during times when the labor market is tightening,
and wages may be increasing faster than historical averages.
Dan Steele, Consultant at the POE Group
