With the cost of living crisis, businesses need to focus on retaining staff and factoring pay increases into overall profitability, explains Stuart Clark, managing director of accountancy firm Russell & Russell
These are hard times all round. Particularly for the generations who have never experienced the inflationary chaos late last century, when interest rates hit 17% and mortgage payments soaked up the bulk of salaries.
That said, it is bad enough now, despite median pay awards to January standing at 3%, their highest for a decade. Employees are being attacked on all fronts, with soaring home energy bills, skyrocketing petrol prices, and startling increases in food – up 13% on average over the past year – and public transport costs.
It is inevitable in this series of financial blows that many employees will turn to their employers to help them weather the storm. And employers who are keen to keep their teams intact will be asking themselves: how can I further increase rewards without damaging the business?
The answer, as in so many otherwise intractable business scenarios, is to know the numbers, analyse them and use them as a clearly signposted pathway towards well-informed decisions.
The first step in considering remuneration policy is to discern what percentage salaries are of the direct cost of sales, and what the effect on the business would be if that percentage were to go up.
Take, for example, a business with a £3m turnover, gross profit of 30% and a net profit of 10% (£300,000).
An across-the-board increase in direct costs of 6.25% – which may consist of increased wages (and the increased employer contributions on this increased salary) and the increased employer National Insurance contributions (NIC) (up 1.25% this year) as well as any other direct material increases – would mean that the firm would have to increase sales by over £500,000 (ie, over 17% to £3.5m) in order to maintain the same levels of net profit (£300,000).
Or it could increase prices by 4%.
On paper it’s a no-brainer. Yes, a hike in prices might lose some custom, but clients are much more accepting of small increases in the current climate – and, with an 8% increase the firm could even afford to lose some customers and still make the same, or more, net profit. More money for less work.
The trouble is that many companies and organisations don’t look at the situation in this light and assume that they can realistically cover the costs of wage increases by the simple expedient of going out and winning more business. That is an unnecessarily hard hill to climb.
Businesses with strong teams and productive individual workers will obviously want to strain every sinew to retain them. Apart from the disruption inherent in frequent staff turnover, the recruitment costs to replace them are significant, with research suggesting an average of £11,000 per employee.
But there are other ways to encourage loyalty and good staff retention rates, such as offering interest-free loans – up to £10,000 is permitted at the moment – to be offset against future wages. This can help employees with, for instance, expensive season travel ticket costs.
Employee Assistance Programmes can also help to make people feel valued and wanted by supporting them with advice on areas such as financial planning and debt management, and perhaps counselling for staff who are struggling to make ends meet. In these trying times, many firms are also offering mental health support.
Bonus schemes are a double-edged sword. While they may be initially welcomed by employees, experience suggests that some staff may quickly feel entitled to them and expect the extra payment simply for doing their job – and become disincentivised if the bonus is withdrawn.
The simplest solution to staff satisfaction is to strive wherever possible to pay the market rate and, if practicable, something over and above.
And, while remaining sensitive to the inflation-fuelled trials that employees face, as well as the 1.25% increase in employers’ NICs, it is not unreasonable for employers to make the case in the workplace that they, too, are under the cosh from unprecedented increases in materials costs, business rates, living wage demands, premises and transport costs, and other margin-eroding pressures.
Responsible employees will take this into account and may be persuaded to exercise restraint if offered a more structured and advanced personal development plan, or a healthier work-life balance. A 2018 study said that 92% of employees felt benefits have a positive impact on overall job satisfaction.
None of these issues are going away anytime soon. UK inflation is at a 30-year high of 9% and may yet go higher.
But employers who are asking themselves if they can afford to lend a helping hand through wage increases should perhaps, more pertinently, be asking themselves if they can afford not to.