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Gene (00:05):

Hey everybody, this is Gene Marks and welcome to this week’s Small Biz Ahead podcast from The Hartford. Thank you so much for joining me. One of the issues that have been coming up a lot recently, because I’ve been getting a lot of these questions from my clients, is about raises. Recently, ADP, the big payroll company, they actually published their national employment report every week and every month, excuse me. And their most recent report from December was reporting that the average employee at a company received a 7.3% salary increase over the past year, the past 12 months. And the average employee who switched jobs received like a 15% pay increase. Now I know what you’re thinking, I don’t want to give you any ideas, but just so you know, obviously people that switched jobs, got quite the bump – good for the employees in this time of high inflation…

Gene (01:01):

We’re between seven and 8% inflation. It is completely the right of any employee to ask for money to keep up with the cost of living and if they can get more, good for them. But of course, it does create a challenge to a business owner, right? I’ve got this issue with my employees, I’m sure you do with yours. What do you do? You have an employee that comes in and doesn’t want to, is asking for a salary increase. There’s only so much you can increase prices to your customers. I mean, you’ve got your own overhead issues to worry about. Once you increase salary for one person, you’re gonna have to increase to somebody else. If somebody’s gonna switch jobs or you leave, threaten to leave a job cuz they’re gonna get a higher pay somewhere else.

Gene (01:42):

Or if you wanna hire somebody and they’re looking for a higher salary because they’re switching jobs and than what you’re willing to pay but they’re really valued. What do you do? What do you do? I mean, people need more money. You are trying to maintain your margins and your profits. How do you afford it? How do you afford it? Well, I’ve got a few ways that I’d like to suggest that you do, that could help you afford this. And I thought that I would share them with you. I actually have seven ways that I think might be of importance to you. So I don’t know if you’re taking notes, but you wanna listen to this podcast again, but I’ll try and go through them as slowly as possible. Let me give you my seven ways to afford salary increases.

Gene (02:20):

You ready? Okay, number one, tie an increase to performance, right? I mean, you can offer to an employee to say, listen, I do want to give you an increase, but we’re gonna have to tie that to something measurable that we can record. Maybe it’s a list of deliverables that you want from that employee to get done. Or sales goals that they have, if they’re in sales or customer service metrics they can reach. Offer to them that if they meet those objectives, then you’re willing to give them more in the form of a bonus. And frankly, if they exceed those objectives, maybe you wanna build in even more money. So you can, you can kind of dangle that in front of the employee and say, listen, I’m all about giving you a raise.

Gene (02:58):

You do what I need from you, you’ll get that raise if you do even more than what I need from you, I’ll give you even more than your raise if you think that you can profit off of that. So number one, tie that increase to performance. Number two, if you don’t wanna pay out the money, consider offering more paid time off and more flexibility and more work from home and maybe a four day work week or something like that. Because listen, employees value their time off and their quality of life just as much as any compensation. So you might say listen, I can’t afford to give you that time off, the pay increase, but we’ll give you an extra day a month or an extra half day, or we’ll let you work from a home more.

Gene (03:37):

Or maybe we can figure out a four day work week strategy where you’re getting your job done, but you don’t have to come into the office as much or be as accountable. So that’s another option. Number three, pay more for health insurance. You see, the way health insurance works is this, when you pay an employee’s health insurance premium, it’s not taxable. So if you… instead of giving that employee a raise, tell them, listen, we’re not gonna give you a raise. We’re gonna pay more for your health insurance because when they do that, the employee doesn’t get taxed on that payment. If the employee was getting a raise, that employee would get taxed, both state and federal. And you, the business owner, you get a deduction when you pay the additional health insurance and you don’t have to pay any employer taxes when you do that, or workman’s comp for example.

Gene (04:27):

And in the end, if you’re paying more for health insurance, the employee’s walking away with more in their net paycheck. So everybody’s happy. So pay more for health insurance. That’ll save you some money on that raise. Number four, I talked about passing the… increasing prices. Well, if you can pass the cost onto your customer, sure enough, but you might wanna reconsider that. It’s tough to pass on the cost, dollar for dollar to a customer. So my advice is, is that you build in your raises across your entire overhead and then you have a general price increase across all of your products because you can share that price increase across the board instead of maybe one product line or one service, and therefore it kind of cushions the effect of that cost to increase. So maybe you do wanna raise prices and pass the cost onto your customer, but spread it out among everybody.

Gene (05:17):

Number five, if you still are gonna pay the raise… maybe you want to ask for something back and that something could be a long-term employment contract. If you have an at will employee, an employee can still leave or you can still terminate that employee. So that’s still in effect. But signing a contract does, it is a commitment that both people are saying and at least that way, if you can agree in advance on what your increases will be, maybe over a period of time, maybe benefits as well. At the very least, your employee can be assured of getting that pay increase whenever that is going to occur. Cuz you put it down in writing and you can budget, your cost that much better. Maybe you can spread it out over a period of time and make the impact that much less on you.

Gene (06:03):

Number six, do a 401k match. Now, first of all, SECURE 2.0 recently came out. There’s definitely benefits on that to help small employers match their employees contributions to their 401k plan. But whether or not you can take advantage of those benefits or not, the more that you can match your employees 401k, not only helps them save for retirement, but it will enable you to put away more for retirement because the more your employees are putting away the more chance you have of not failing those discrimination tests, which limit the contributions you can make because you’re a highly paid employee or an owner of the company. So you can save money that way. In other words, you put that contribution into your employees in the form of raise to their 401k, and then you can save on your taxes by putting more money into your 401k as well.

Gene (06:59):

So do a 401K match, it’s something to consider. And finally, you might wanna consider an employee stock ownership plan or an ESOP. Now these don’t happen overnight, but they have really been increasing in popularity. And with an employee stock ownership plan or an ESOP, instead of giving a raise, you can give that employee a little piece of the company. Now with an ESOP, you’re not selling your whole company. You don’t have to do that. You can sell 10% of your company to your employees or 25% of your company. It doesn’t have to be anywhere near control of the company, but it gives them equity in the business and that way they can build up value that way. And there’s a psychological benefit of getting that as well. People love that. I mean, ESOPs tend to perform better or more productive and are more profitable, than non ESOPs according to a number of studies because employees take that much more pride in the business.

Gene (07:50):

So you can give away a little bit of equity, you could get a lot more profits back and that employee is getting that compensation in the form of shares instead of an actual cash payment app. And by the way, there are enormous tax benefits when you form an ESOP. So let me recap the seven ways you could possibly afford employee raises this year. Okay? Number one, tie these raises to performance a bonus based on deliverables. Number two, instead of giving a raise, offer more paid time off or flexibility or work from home or a four day work week. Number three, instead of giving a raise, pay more for their health insurance because it’ll save them money on taxes and save you money on taxes, which will blunt the impact of that, that increase. Number four, pass the cost onto your customers, but try and spread it out among all of your products and overhead.

Gene (08:42):

Number five, give them the raise, but make it part of a longer term employment contract. Maybe you can spread out that increase, but get your employees to commit and also be better. You’ll be better able to budget out your expenses. Number six, do a 401K match cuz yeah, you’ll put money into your employee’s retirement account, but then that will enable you to put more into your retirement account and therefore save money on taxes. And finally, number seven, consider an ESOP. Like I said earlier, it won’t happen overnight, but it is something that could be a great benefit without costing you cash. And, could pay back in profitability and productivity increases. That’s ESOPs… have been very, very successful with many of my companies. So those are seven ways to try and afford your salary increases this year. Try them. Let me know how you make out. Leave us a comment or email me or visit us on or because you’ve been listening to the Hartford Small Biz Ahead Podcast. My name is Gene Marks. I hope you found this information helpful and this advice helpful. I will be back with you next week to offer some more advice to help you run your business. Thanks so much for listening. See you then.

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