Client Case Study: Revenue Erosion Due to Salary Increases

Nov 25, 2024

The Challenge:

A small business noticed diminishing revenue year over year despite continuous sales growth but couldn't pinpoint the reason. Upon review, we discovered that salaries were increasing by 4% annually without any caps, while the business hadn’t adjusted pricing to match rising labor costs. This was eating into profits, creating financial strain, and the owner was unsure how to adjust without causing disruption.

The HR Solution:

  1. Pricing and Salary Structure Review: We conducted a comprehensive review of both salaries and the company’s pricing model. It became clear that there were no salary caps, and employees were consistently receiving above-market pay increases, with no corresponding adjustment in client pricing.

  2. New Pricing Strategy: To restore profitability, we developed a revised pricing structure aligned with the company's increased labor costs. The new rates were communicated to staff who handled quotes and pricing, along with a clear go-live date.

  3. Market-Competitive Salary Ranges: We benchmarked industry salaries and created fair, market-based pay ranges, establishing a cap to prevent excessive wage inflation. This helped maintain a balance between fair pay and sustainable business costs, while also encouraging alternative ways to engage and motivate employees beyond salary.

  4. Communication and Support: We facilitated staff Q&A sessions to address concerns, ensure understanding, and provide ongoing support throughout the transition. Additionally, we crafted a communication plan for informing clients of the price changes, minimizing any friction during the rollout.

Why Salary Increases Alone Aren’t Enough:

In addition to the financial strain, relying solely on salary increases to motivate employees poses its own problems. Compensation alone isn’t a sustainable driver of engagement. We always recommend that our clients take a balanced approach to employee motivation—through purpose, engagement, and recognition—rather than relying on money as the sole motivator.

High pay for roles that may not command such wages elsewhere can create a “golden handcuff” effect, making it difficult for employees to leave the company because they know they won’t find similar compensation for the same work. This can become a trap for both the employee and the employer, potentially leading to a workforce that is overpaid, unproductive, and disengaged—ultimately harming the company’s culture and long-term performance.

The Result:

By implementing these changes, the client saw improved profit margins within months. We had a plan and a clear salary range to ensure employees were or become aligned with market salary rates, preventing overpayment while ensuring retention. The company also adopted additional strategies for employee engagement and recognition, reducing reliance on annual pay increases to motivate the team. With the new pricing updates, the business was positioned for sustainable growth, avoiding the risks of overpaying for talent while fostering a more engaged and productive workforce.

If your business is facing similar challenges with profitability, salary management, or employee engagement, reach out to Emma today at emarriott@iris-hr.com we’d love to learn more and help you find solutions that work!