Payroll Cost Control Strategies: Lifting a Wage Freeze

Last year, wage freezes were widespread among employers looking to control costs. Now as the economy begins to recover, many employers are looking to lift those freezes.

There are a couple of strategic reasons employers are shifting to lifting wage freezes:

  • Employee retention. Employers recognize that even though the economy hasn’t completely rebounded, employees are analyzing their options and are considering making a change. A recent statistic indicates that 70% of employees are planning to look for a new job when the economy recovers. Employers understand the hiring and training cost associated with new employees and are looking for ways to retain their current staff. Here you will find tips on increasing employee retention through non-cash incentives.
  • Possible inflation. It may be easier to stagger the wage increases over a few years rather than to absorb it all at once if inflation occurs. Imagine a 6% increase. Would you rather split the increase over two years or absorb all at once? In either case, plan for it in your budget so there are no surprises to your bottom line.

If you decide it is time to lift a wage freeze it’s important to treat each employee equally in order to be compliant and avoid expensive legal fees. Lifts should be given careful, equitable consideration. Paying for performance can enter the equation but length of time should be treated the same for every employee to insure equal treatment under the law. For example, take into account an employee who has worked for the company since October 1, 2007. His last merit increase was October 1, 2008. The employer has two options when lifting a wage freeze:

  1. Implement his merit increase effective July 1, 2010 without any retroactivity
  2. Implement his merit increase effective July 1, 2010, retroactive to some past point in time that is the same date for every employee

When considering retroactive pay identify the pros and cons upfront. Employees will no doubt appreciate the extra cash but the money may be taxed differently than ordinary income.

Your employees are your greatest assets so you will want to plan carefully for implementing and communicating changes regarding wages. If done correctly, you will benefit from retaining employees while protecting your bottom line.

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