When a valued employee asks for a pay rise, it can be tempting to say no. Budgets are tight, salary reviews are approaching and businesses need to manage costs carefully.
But what happens when that employee decides to leave?
A salary increase might seem like an additional expense, but losing an experienced employee can trigger a much bigger financial cost.
Let's look at what replacing an employee could cost a business...
1. Recruitment fees
Let's say an experienced Project Manager requests a $5,000 annual salary increase. The business declines and they accept an opportunity elsewhere.
The business now needs to recruit a replacement.
Depending on the salary, recruitment agreement and fee structure, professional recruitment fees alone could start at $15,000 or more.
But this is only the beginning....
2. The hidden cost of time
Recruitment takes considerable time from the people already running the business.
A typical recruitment process involves multiple interview rounds, CV reviews and preparation, internal discussions, candidate assessments, reference checks and offer negotiations.
If a director’s time is valued at $200 per hour, a relatively straightforward interview process can quickly become expensive.
Time is money. Here is what that looks like in a typical recruitment process typically involving two or three senior leaders:
Reviewing CVs and shortlisting: 3 hours – $600
Preparing for six first-round interviews: 3 hours – $600
Attending six first-round interviews: 6 hours – $1,200
Conducting second-round interviews with three shortlisted candidates: 3 hours – $600
Internal discussions and decision-making: 2 hours – $300
TOTAL: 17 hours – $3,400
Employment contracts may need to be prepared or reviewed by a lawyer too, particularly for senior or specialist positions with fees typically starting at $2,000.
And what happens if the preferred candidate declines the offer?
The process is back to square one.
3. Training and onboarding
A new employee might have the right qualifications and experience, but they still need to learn your systems, processes, clients and company culture.
Consider a new Project Manager joining a property consultancy. They need to understand existing projects, consultant relationships, reporting procedures, internal systems and client expectations.
This requires time from senior employees and managers.
If a manager spends 40 hours over the first 3 – 6 months of supporting and training a new employee, at an hourly rate of $200, that's another $8,000 in management time.
And that is before considering the new employee's time to become fully productive...
4. Lost productivity: The impact on the wider business
Recruitment doesn't happen overnight. A vacancy can involve briefing a recruiter, reviewing candidates, conducting interviews, checking references and negotiating an offer. Notice periods can add another four weeks or more before the new employee starts.
During this time, projects still need to be delivered.
Other team members may need to absorb additional responsibilities, decisions may be delayed and client relationships may require extra attention.
5. Further resignations: One departure can become several
Sometimes, one resignation prompts others to reconsider their options.
If a valued employee leaves for better pay or career progression, colleagues may start reviewing their own market value and exploring opportunities elsewhere.
For example, a consultancy loses a enior Project Manager who moves to a competitor. Two colleagues begin speaking with recruiters after seeing the opportunities available elsewhere.
What started as one unsuccessful salary conversation can quickly become a much bigger retention challenge.
Looking beyond the salary
Not every pay rise request should automatically be approved. Businesses need to consider performance, market salary benchmarks and budget constraints.
However, salary decisions should be made with the full picture in mind...
Before declining a salary increase, consider whether the decision accounts for the potential costs of losing that employee.
If you enjoyed this, read our blog on Is it the employee...or your leadership style?
