Today’s recruiting challenges are rapidly leading to real time, in-house, employee adjustments! Your existing workforce is very aware of the wage inflation strategies being used to attract new employees. Whether or not it is true for your organization, the perception exists and will become a real issue when the next performance review time arrives. At the beginning of each year, employers typically ask for industry specific survey data that can provide benchmark wage ranges for various jobs. These requests traditionally focus on existing workforce incumbents and align with growth rates in the targeted industry segment. For 2019, it may be more effective to benchmark new hire wage rates, and measure your in-house wage scales accordingly. It is even more difficult to enlist a current employee to be a trainer when they think their current wage rate lags in comparison to the new person.

Adjustments are Needed to Maintain your Current Workforce!

The wage inflation that results from making your new hire entry rate more attractive is just one of many adjustments required to maintain the employees you already have. Most organizations do not look closely at the other added costs associated with internal wage compression, equity adjustments and add-on costs such as payroll taxes, workers compensation and healthcare. A deeper dive would reveal the need to address additional training costs, finding a trainer, scrap adjustments, productivity standards and new employee integration into your existing workforce.

The Financial Impact of Wage Inflation on your Bottom Line?

Finally, the biggest challenge of all is how do you pay for these wage adjustments? While affected companies are having a mixed level of success around passing through raw material price increases due to tariff issues and currency fluctuations, very few are able to gain increased price concessions for the total cost of today’s new hires. With almost no chance of receiving relief for the increased new-hire related employment cost, most of these added costs are absorbed by the company’s existing income level. Margin compression then becomes a greater reality.

Donita Rudy, of Compass Advisory Partners and a SEWN consultant, recently presented an example of the financial impact that a $1.00, across the board wage increase, might have on a typical business (these are generalizations from actual business Profit and Loss statements). The before and after income statement from this analysis reflects most of the cost changing factors detailed above:

Income Statement (before and after wage adjustment):

  • Assumes no price increase allowed by customers.
  • Labor includes wage increases, compression adjustment, and equity adjustments.
  • Material includes scrap, rework, inventory increases.
  • Direct Overhead includes training and benefits increases.
Before Wage AdjustmentAfter Wage Adjustment
Revenue100%100%
Less C.O.G. Sold:
Labor
30% 31.85%
Material20%21.10%
Direct Overhead10%10.60%
Gross Profit40%36.45%
Less:
Overhead Costs32%32.65%
Profit8%3.80%

Strategies for Mitigating your Declining Profits

While the bottom line effect is real, Donita’s strongest recommendation is to turn the short-term profit drop into a long-term investment for future success. Hiring in today’s business environment is a necessity and giving wage adjustments to current employees is more than just a cost of doing business; it should be a positive reflection of your values and culture! The following are just a few suggestions on how to bridge the declining profit gap:

• Accelerated pay for performance system.
• Create skill-based pay differentials.
• Focused internal cross training that helps create in-house trainers.
• Create a job candidate referral network with neighborhood businesses.
• Expand your service provider network and negotiate everything.
• Commit to lean manufacturing strategies and address productivity levels.

This example is presented to encourage a thoughtful evaluation of how your company can approach the changing job marketplace and where to focus your recruiting dollars going forward. The reality of the skills gap crisis is manifested in everyday costs and profits. Donita’s advice for all manufacturing organizations “is to be proactive in your financial analysis and strategic planning regarding the potential impact of the tightening labor market.” The Manufacturing Alliance is committed to presenting as many options and opportunities as possible to assist our members in making positive workforce decisions. Please visit our website at https://www.manufacturingalliancepa.com. If you would like to register your business on the Manufacturing Alliance website, please contact us directly by email at [email protected].