Ask the Expert: How Can I Keep my Employees without Spending Too Much on Payroll?

Dear Evan,

I am having trouble keeping staff, yet I can’t afford to pay more. Any advice on how I can keep my franchise staffed with good workers without spending more money on payroll?

- Paul S., Oregon

Dear Paul,

Your question is very timely. Right now, is one of the most difficult times for franchises to keep good workers.

The success of any franchise is based on keeping wages relatively low. Yet in the current strong economy, fewer people are willing to work for lower wages. No matter how good a working environment you create, some employees are going to leave because they need more money and health insurance. It’s just a fact of life.

Yet to remain profitable, your franchise needs good workers. If your turnover rate increases and more of your employees are new and untrained, the quality of your customer service declines. That can have a negative impact on your Net Promoter Scores and customer satisfaction levels. And if your company gets a reputation for poor customer service, people are going to take their business elsewhere.

The simple thought that you can just raise prices and pay people more is flawed. If you could raise prices, you should have done that already. If raising prices reduces business, it could cause more harm than good.

But despite those potential problems, there are opportunities to create an environment in your franchise that keeps it competitive in the marketplace. The first question you have to ask yourself is whether you can keep your ratio of salaries paid at a level that keeps your business profitable. If you are in the restaurant business, for example, you for instance would want payroll to be about 25% of profits. What if you increased that percentage?  Hold that thought.

If you have a retail store, better employees can upsell or make bigger sales. In a fast food franchise, employees can upsell by encouraging patrons to add desserts or fries. Or satisfaction rates also increase repeat and referral business. If paying good employees a little more can accomplish that, the expenditure could be worth it. Additionally, if you have strong employees, you will probably need to employ fewer people working at one time, which provides efficiencies to justify higher compensation.

But you have to remember that investing more in payroll to retain higher-quality staff produces more business or better utilization, and you can create some projections based on that; better employees can raise your sales by 10%.  For instance, if you’re a restaurant and your variable costs are 30%, by increasing your payroll from 25% to 29% of your sales, additional sales will result in 7% more profit dollars; if you subtract the 4% you added in increased employee, you will still improve overall profits by 3%.

Bear in mind that spending more on wages should pay you a return in increased profits. It is not like spending more for utilities, rent or product. Paying more for those items will not result in any incremental improvement in business.

 

So, if you can increase the percentage that you spend on wages, that would result in business growth; other percentages like rent and marketing would go down. Your net overall expenses could be the same or even lower. You can do the math and determine how much sales would need to increase if you increase your compensation as a percentage of sales.  Then determine if higher quality staff and lower turnover would likely result in that increase in sales.

Important considerations:

  • Focus additional comp only on employees that you value and want to keep, not on employees that are not providing you the value that you need.
  • Constantly look to upgrade your staff, so you're a real team of superstars. Quality people like to work in an environment where there are other quality people. Your underperformers don't just hurt you with their lack of performance. Your best performers will leave because they don't want to work with underperformers.
  • Factor a retention bonus into your compensation plan. If an employee knows that they're going to get a dollar an hour bonus on their anniversary date, it will help you retain people more powerfully than simply paying them a dollar more an hour.
  • Benefits are very important, employees will leave you if you do not provide them.You should factor this in any increase in compensation, but make sure your employees understand the value of the benefits.

I hope that you find these suggestions helpful.

Evan Hackel

Have a question about your franchise? Email your franchising question to editor@cgbpublishing.com. We look forward to hearing from you! Please note that your questions may be edited for length prior to publication.

Evan Hackel is CEO of Tortal Training, a leading training development company in Charlotte, North Carolina, and Principal and Founder of Ingage Consulting, a consulting firm in Woburn, Massachusetts. To learn more about Ingage Consulting and Evan’s book Ingaging Leadership, visit Ingage.net. Follow @ehackel.