HR Professionals: Are You the CFO of Labor Cost?

I’m not your boss. I’m not even your coworker or your employee. Right now, I’m your job promotion fairy, and if you’re an HR professional, I hereby grant you a promotion.

You are now the CFO of Labor Cost.

Congratulations, you’ve earned it. Since salaries are the largest cost item in most organizations, it’s extremely important HR professionals manage the process of salary planning effectively. So it’s only right that I bring you into the C-suite. Why?

You’re Handling Big Money

Assume, for example, your company employs 250 people with an average salary of $50,000. That means you manage a $12.5 million dollar payroll. If your total salary increases (including merit, general, promotional, and market adjustments) equals 4.0%, then go ahead and add another $500,000 to your fixed expenses.

These are big numbers requiring sound compensation methodologies and tools to control costs while still delivering competitive pay.

Sound intimidating? That’s why you’re the CFO of Labor Cost: because you’re up for the challenge.

You can effectively manage those large sums of money by utilizing salary planning and following these 7 steps:

  1. Understand Your Organization’s Compensation Strategy—A formal compensation strategy endorsed by top management will guide your salary increase budget process. Know whether the strategy is to lead, lag, or match the market.
  2. Know Where You Stand in the Competitive Marketplace—After completing a competitive market pay analysis, you’ll know where you stand against the market. Use this information to help determine your salary increase budget.
  3. Review Results from Compensation Planning or Salary Budget Surveys—Participate and obtain results from a few reliable salary increase surveys, such as CHRG’s Salary Planning Survey. These surveys give actual results for the most recent year, including what’s budgeted for the upcoming year for many types of increases, organized by sales revenue and industry type.
  4. Determine the Size of the Salary Increase Budget—Each year salary increase budgets should be developed based on several factors, including the organization’s financial results, competitive pay position, employee turnover rates, cost-of-living, and group performance (broken down by business units, divisions, departments, or job functions).
  5. Link Merit Increases to Performance and Position in Salary Range—Using a performance-based approach allows you to deliver more merit dollars to high performers who are paid low in the salary range and to slow down merit increases for low performers who are highly paid.
  6. Determine How the Salary Budget Is to Be Allocated—Distribute the salary increase dollars based on all of the data you’ve collected to this point. As an example: let’s say some departments or functional areas (such as Human Resources) displayed outstanding group performance over the past year, but collectively the employees are paid below that performance level. In this scenario, you may differentiate the budget percentages based on performance and business need.
  7. Assist Managers in Planning Increases for Each Employee—Give managers tools that can help them plan merit, promotional, and market equity increases for each employee. Providing managers with software that empowers them to plan individual increases and allows them to review their overall spending and performance rating distribution will result in a more equitable way to deliver pay increases.

Since salary increase planning is such a critical business process, you may want to consider tying it to your organization’s financial budget planning cycle. There’s no better way to be a business partner with the management team than to play a significant role in the financial management of your organization’s resources. Integrating a formal salary plan with the overall organizational budget gives credibility and helps you bring value to your organization.

By the way, that promotional increase for your new CFO of Labor Cost role should be very generous—you deserve it.

Note: If you enjoyed this article, check out my new bestselling HR book Pay Matters: The Art and Science of Employee Compensation.

© 2021 David Weaver. All rights reserved.