Budget: The key indicator of employee compensation

by on June 16, 2009 · 0 Comment POSTED IN: HR Info Center

“How much can the company afford?” is the first employee compensation question asked.

The first thing that you’re going to find in reality and you’re going to know this when you hear is, it’s budget. The way raises come in reality is a company has got to say, first and foremost, how much can I afford for employee compensation?

Let me give you an example to make the point here. We’re going to start with an example of a company that is based in Atlanta, Georgia. Delta Airline, think back to 2006, January 2006. Imagine what it looked like for all those employees at Delta Airlines when they were told in January that they all across the board were facing a 14% cut in employee compensation. What happened to pay for performance at Delta Airlines? Well, they don’t have any money. If you don’t have any money, why are we talking about raises? For most of us out there, how much you spend on employees is a big part of the way things work. It’s a big part of your overhead – your operating cost. Putting additional money into fixed cost like employee compensation, in terms of controllable cost, it’s one of the biggest challenges we have.

Now, let me get you out of Delta Airlines. Let’s go to some other airlines that are doing better. How about Jet Blue?

Imagine Jet Blue in January 2006, if you were the board of directors of Jet Blue, how much money would you put in your employee compensation pie? You’re even approaching 2007 and you say to yourself, how much can we put in toward employee compensation? How big do you think that pie is? If the national average is three, you’re the board of the directors, what do you do?

Your competition is slashing their overhead. Your high cost competitors are becoming your low cost competitors. Imagine the expense of running an airline and so what are you really going to do when you go forward? If you’re Jet Blue, in a good year like this, you’ll probably just hold even. You go zero on your employee compensation increase.

Now, if you’re Jet Blue and you go zero, do your employees leave you? Do your employees leave you on a zero budget when you’re a good company like Jet Blue? In all likelihood, no. Why? Well, where are they going to go? The grand majority of them are going to have to stay. They’re just happy that maybe you might make a profit and survive.

A freeze in employee compensation does not affect everyone the same way
Now, a 20 year accountant will not going anywhere, but maybe a two year accountant might leave you. Why? They’ve got other opportunities in the market. They’re not tied to an airline industry.

So, a freeze in employee compensation is not the same for everybody. Bottom line, what we’re talking about, however, is that if you don’t have any money, why are we talking about increases?

Think about the size of your employee compensation pie
Most of us are going to have to at least think about how big that pie is. When you get to a certain size, 100 people or above and most leaders at the top of that organization are going to say, I’ve got to have some control over this, how much more money on payroll? So, bottom line, I think you all get the notion that budge is what will dominate this conversation first.

Hog laws of employee compensation
They’re rules that say, one little piggy shouldn’t get all the slop. If we have a 3% budget from which to draw, how much can any individual personally take away? For example, could any individual without being promoted get 14%? I would tell you, that’s silly. No, they can’t. Not in any company that has any kind of HR leader anyway, because HR leaders like myself, we make up hog laws. We make up rules that say zero to 5% would be, what? Would be reasonable? And we kind of enforce that down the line.

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