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News & Articles

June 22, 2023 |

Negotiating Pay Raises with Employees

What MSPs need to know about salary negotiation in an age of inflation, recession, and emerging wage transparency rules.

INFLATION has everyone spread thin. Your employees (especially high performers) may request a salary increase in response, but you are dealing with elevating expenses for your MSP business. Not to mention a looming recession––which some experts declare will be soft, while others are less optimistic. Top that off with emerging wage transparency laws that make employee compensation more complex.

At a time when finding new employees is still difficult, and existing employees may be drawn to greener pastures, here are some tips for negotiating pay raises in light of these complex issues.

Establish a Structured Compensation Review Process

At Greystone Technology, an MSP and IT services provider based in Denver, management conducts compensation reviews with every employee at the conclusion of each year. Any salary increases that result come into effect January 1.

Peter Melby

CEO Peter Melby explains that these conversations take place around the same time the company reviews its contracts and pricing. In this way, he says, employee compensation is more connected with the rest of the business. (For example, if an employee receives a wage increase, it’s possible that the accounts they oversee will also see a rise in fees.)

These discussions are separate from employee performance evaluations, which, in Greystone’s case, take place monthly. This helps employees view performance evaluations as just that––an assessment of the quality of their work––rather than a salary discussion. It also helps management maintain a track record of employee performance that may inform the year-end compensation review.

Greystone does increase pay on a consistent basis, year over year. “This way, we don’t end up in a position where someone comes in and says they need a 20% increase, or a 30% increase, because we don’t fall behind,” he says.

Melby notes that a formal compensation review process decreases the chances of employees approaching management for a raise out of the blue. “It reduces those conversations, probably by about 80%, and then the conversations become situational,” he says. In the latter case, an employee may reveal that they have a higher-paying job offer, or simply that they believe they deserve more money based on the work they’re doing. But largely, salary negotiations at Greystone happen during the period when the company does formal compensation reviews.

Define Guidelines for When to Say “No”

Melby advises being “empathetically direct” when denying an employee a raise. That is, business leaders need to be honest with the employee, and provide them with clear reasoning on why their request won’t be granted.

Melby says there are three main reasons Greystone denies wage increases:

  • Performance-related issues. “They may be eligible for a future increase, but they have to perform better,” Melby says. “And we have to give them a path––very specific, concrete things that we want to see before they can have a pay increase.”
  • They’ve hit the pay ceiling for their position. “In that case, we have to be clear about the way that the market and the company structure works, and that this is the limit for this position,” Melby explains.
  • Economic constraints. “This is something more macro than just what that individual is contributing, or where they’re at in their role,” Melby explains. He says that in this situation, it’s important to communicate that a wage increase isn’t possible right now because of economic realities––and what those realities may be.

In addition, if someone is hired in October, they’re probably not going to get a raise on January 1.

Offer Perks Instead of Pay

Krista Mitzel, founder and managing partner of The Mitzel Group, an employment law and HR consultancy based in San Francisco, notes that companies can offer smaller perks if they’re unable to increase wages. These can include anything from additional health insurance or wellness benefits, to a stipend for the commute to and from the office. She argues that if employees are required to consult work email on their personal phones––which may be the case for on-call technicians, for example––the company should pay at least part of their mobile phone bill. For people working remotely, organizations should direct funds toward their internet plan.

Krista Mitzel

“Oftentimes, offering additional, smaller perks can be helpful,” Mitzel says.

Be Conscious of How Wage Transparency Affects You

A number of states have enacted salary transparency laws, such as California, Colorado, Connecticut, Maryland, Nevada, Rhode Island, and Washington. In general, these laws require companies to post salary ranges in their job listings, and prohibit them from requiring applicants to provide wage histories. They also can’t forbid employees from discussing their salaries with each other.

From a diversity, equity, and inclusion perspective, a potential positive outcome of these mandates is closing the pay gap. But if a company decides to honor a top performer’s request for a 20% wage increase, for instance, it can quickly find itself in a difficult position. What happens when that individual’s colleagues find out about the raise, and also demand 20% more?

David Lewis, CEO at OperationsInc, an HR advisory and services firm based in Norwalk, Conn., admits that this is not an easy situation for employers to navigate. “If you’re going to go ahead and make those types of compensation concessions, you’re going to need to figure out how to do so for others within your company,” he says. This could mean that 25-30% of an organization’s workforce––based on things like tenure, position, and performance––is eligible for a salary boost. In this case, it could also mean that the remaining 70-75% isn’t, which could result in some disgruntled employees.

Lewis likens salary and comp negotiations to a chess match. “Companies need to be very thoughtful and careful,” he notes. “A chess player thinks four or five steps ahead if they’re really good at playing chess.”

Align Compensation with Pricing

As Melby notes, employee compensation should be aligned with what an MSP is charging its customers. Mitzel, too, emphasizes that regularly increasing fees is important in order to remain current with labor market demands.

David Lewis

“In a hardship time, companies should constantly be reviewing their programs with customers, how they’re invoicing customers, and what their costs of goods and services are,” Mitzel says. “Things are getting more expensive, and if [a company’s] prices have been static for years and years, that’s going to impact how it can pay people.” For this reason, it’s necessary to consistently adjust hourly rates and monthly managed services fees to account for labor costs.

Mitzel says the best way to remove the discomfort (and potential animosity) from wage increase negotiations is for employers to welcome these discussions in the first place. “If an employee feels like they can come and speak to the employer about pay or anything else, it creates a great culture where they can really work on issues together,” she says, adding that this also helps companies keep a finger on the pulse of how employees feel about the organizations they work for.

“Employees feel heard, which makes them feel more content and less likely to go to a lawyer if there is a dispute. In general, creating that culture where communication is encouraged really helps employers reduce risk.”

Image: iStock / azarkru

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