A guide to a 2% wage increase

A common question when calculating the cost of hourly wage increases is, “If I increase this hourly wage schedule by 2% will all employees get a 2% increase?” Maybe, but often a 2% hourly wage increase will not equate to all employees receiving a 2% pay raise. There are often two layers of complexity that must be thought through in order to explain an hourly pay raise for employees on a “wage schedule”. The two layers are aging the employees on the wage schedule and how the 2% wage increase is being applied.

Aging Employees

The first step in giving a pay increase on a wage schedule is often aging the employees on the schedule. This is simply done in Gaus Systems by “incrementing” or aging the employees on the wage schedule. So, an employee that was on Step 1 Lane 2 will now be on Step 2 Lane 2. The shock is when you compare the employees at this point in time to the “Live Data” for the current fiscal year. What do we immediately see? Well, there are many employees who received a 0% pay increase. While others received a healthy 1.5% increase or more. Why did this happen?  The employees that have reached the highest step (“bottomed out”) are not aging on the wage schedule. There are no additional steps to take, so those employees have “bottomed out” on the wage schedule. While the other employees have taken a step on the schedule and normally receive a 1.5% to 2% increase just by being employed for an additional year. The question to ask is, “Should we automatically age the schedule?” This is normally where the confusing begins because you haven’t applied a 2% wage increase to all employees at this point. You’ve only given a step or aged the wage schedule. Depending on your contract language or your agreement with those employees you may not need to automatically age the schedule. If you can’t afford to give more than the cost of aging the employees on the wage schedule you normally need to communicate with the employees who have “bottomed out”. The “bottomed out” employees will not be receiving a pay increase in this scenario. When organizations don’t age a wage schedule they normally come up with additional ways to compensate the “bottomed out” employees. These compensation schedules are often called longevity. The purpose of a longevity schedule is to reward employees for their years of service to the organization. This adds a layer of compensation complexity. You can see how Gaus Systems makes longevity pay simply to setup and run.

2% wage increase is NOT a 2% wage increase for all

For this post, I’m going to state that you did age the schedule. So, all employees took a step on the wage schedule. There are now employees that have no wage increase and some employees who have a wage increase. How will you apply your 2% wage increase? We’ve watched many organizations state that the Total Package Increase should not be greater than 2%. Therefore, you need to run your quick compare in Gaus Systems to see where your Total Package Increase stands. Then apply the necessary wage increase to the schedule. Within our system, you can quickly apply the wage increase as a percent or dollar increase. You can also apply the increase to a base that drives the entire schedule or apply the same increase to all the cells that make up the wage schedule. Based upon how your wage schedule is set up will determine the costing behind the increase that you need to apply. A $.25 increase on the base will have a higher cost impact than giving every employee a $.25 flat increase. This may seem complicated but within Gaus Systems we make it easy for you to analyze these decisions in a projection, then act upon the best pay increase decision for your employees while thinking about the organization’s budget constraints.

Want to see how to do this quickly in Gaus Systems? Email me to schedule a demo. david@gaussystems.com

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