Stop Being Cheap: Why Saving Money On Salary is Costing You Big Time

Business.com / Hiring / Last Modified: February 22, 2017

Saving money by being stingy with salaries and raises rarely pays off for the company. Think hard before you treat someone poorly.

Here is a true story and a cautionary tale about an attempt to save some money on a salary.

Jane received a promotion at work. When she received the paperwork from HR, they detailed a salary that included a 10 percent raise.

She was thrilled and happily began her new position.

A few weeks later, the HR manager called her in. "Jane," she said, "There's been a mistake. Your increase was supposed to be a five percent increase, not a 10 percent one. We're changing your salary effective today."

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Jane was shocked. The new job had a lot more responsibility than the old one. She'd made plans for the extra money.

She was doing a good job with the new responsibilities and getting up to speed faster than people would expect.

She made these arguments to the HR manager to no avail. It had been a clerical error, and there was no way she could honor the original paperwork.

Jane went to her boss. Her boss hadn't seen the paperwork and wasn't aware of the original 10 percent offer.

He agreed with Jane, though, that she deserved to keep the full raise based on the original offer letter. He made his case to the HR manager. She held firm. There would be no 10 percent raise.

What did Jane do? Did she say, "Oh well, mistakes happen?" No. She started looking for a new job and within a few weeks turned in her resignation. 

Now, you can argue that Jane was being ridiculous. She was still earning five percent more than she had before. She still had a new title and new responsibilities.

Her career was still on track. But Jane felt she'd been treated unfairly. She had been promised one thing and received another. She understood how errors can happen, but she felt the company should take the hit.

What Was the Financial Outcome?

Jane didn't tell me what her salary was, but let's say that she had been earning $50,000 before the raise.

A 10 percent increase was $5,000 and the five percent raise was $2,500.

So, the company saved $2,500 a year by not honoring the original paperwork. Let's say that Jane would have stayed in the position for three years if she hadn't felt tricked, so overall, the HR manager revoking the mistaken raise would have saved the company $7,500 in total.

But Jane left. She found a new job, with an even higher salary than the original 10 percent raise. And now? The company has to replace Jane. What's the cost? 

Related Article: Salary Negotiation Tips: How to Ask For (and Get) a Raise

Well, turnover can be expensive. Here's what they had to do:

Overtime payments:

OT to all the employees who had to do Jane's tasks while they searched for a replacement.

Recruiting costs. 

The in-house recruiter could handle Jane's position, so they didn't have to pay a headhunter, but it meant that the recruiter couldn't be doing other work. In addition, it costs money to advertise the person.

Interview costs. 

Many people don't think about these costs. But, let's say the recruiter identifies 10 candidates. The candidates then need to each be interviewed.

The hiring manager spends three hours conducting phone screens. Then the top five candidates came in for in-person interviews.

The hiring manger spent five hours interviewing, and his boss spent 2.5 hours interviewing.

That's a great deal of time that could have been spent doing something else. Total lost productivity. And in a lot of companies, more people are involved in the interview and hiring process.

All that time spent with candidates could have been spent doing productive things. Earning money for the company.

The offer. 

They made the employment offer at $52,500, the same amount Jane was earning. But that had been below market rate, and the first candidate tried to negotiate a $55,000 salary.

What Jane would have been making with the 10 percent increase. They were unable to come to an agreement, and the top candidate turned them down.

They made an offer of $52,500 to the second candidate, who also said it was too low. The HR manager refused to budge, and the second candidate withdrew.

At this point, the hiring manager was desperate. He's lost Jane and the top two candidates. Finally, they make an offer to their third choice. She asks for $56,000 and they agree to the salary.

Related Article: When a Promotion is Not a Promotion: What Can You Do?

Training period. 

Jane was experienced in the area and the company. She required little training to take over the higher position. The new candidate? Remember, she was the third choice.

She needed a lot of training and support to get up to speed. And she was making more money than Jane would have, even with the higher raise.

General estimates for the cost of turnover are 25 to 50 percent of the annual salary for the position.

The HR manager was being stubborn and attempting to save a few pennies, but instead ended up costing the company far more than the $2,500 per year she tried to save in the first place. Jane moved on and landed a higher paying position.

Saving money by being stingy with salaries and raises rarely pays off for the company. Think hard before you treat someone poorly. It can end up costing you and the company dearly. 

 

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