Author: Evert Kraav
As we enter the last quarter of the year, companies are not only finalizing budgets but also laying the foundation for talent retention and growth. A significant portion of this planning revolves around payroll – the investment in your people who ultimately drive the success of your business.
How should we budget for this? Here are some key aspects I personally monitor when working with companies to optimize their payroll budgets.
1. Wage growth in the country
The easiest way to start is by monitoring wage growth in your country. Local statistics authorities typically publish this information. For example, Estonia has seen a 7% year-over-year increase in wages, while the UK reported a 6% increase. However, it’s important to remember that the percentage alone shows a trend—it doesn’t provide specific guidance on what level of pay to offer for different roles.
2. Salary surveys
Salary surveys are an excellent resource for finding salary levels across different job families and job levels. These surveys help pinpoint variations between roles and track year-over-year movement. Typical sources include Mercer, Aon, and Willis Towers Watson in Europe, or Figure Baltic Advisory in the Baltic countries. Be sure to validate that the survey data is relevant to your specific industry or sector to avoid budget misalignments.
3. Forecasts
While wage growth and salary surveys give a picture of what has already happened, budgeting also requires estimating the future. Although no one can predict the future with certainty, many organizations provide educated forecasts. Larger banks often release macroeconomic research papers with wage forecasts based on aggregated data. For example, Swedbank forecasts a 7% increase in wages for Estonia in 2025.
4. Internal data
It’s equally important to assess your internal data. If there are no significant issues in pay competitiveness, relying on external data might suffice. But if your organization is facing pay gaps, high turnover, or difficulty attracting talent, you may need to allocate a higher investment. Conducting internal equity reviews or employee engagement surveys can help diagnose these issues and determine where extra resources should be directed.
5. Inflation
Finally, while inflation impacts everyone’s costs, I don’t recommend basing salary decisions purely on inflation rates. It’s certainly a relevant macroeconomic indicator, but relying solely on inflation can disconnect pay from the actual market value of your roles. The factors mentioned above – wage growth, market data, and internal factors—are better indicators for setting a fair and competitive payroll budget.
Balancing costs and investments
It’s important to recognize that we don’t have unlimited funds to budget for an ideal scenario. The current economic outlook may prompt companies to delay some investments. However, for most organizations, employees are the ones delivering results, so keeping the right people on board is essential.
When budgeting for next year, here are some considerations to balance salary costs:
- Workforce planning: How many employees do we really need? Is it possible to hold off on some replacements or new hires to increase the pay for existing employees and retain critical talent?
- Outsourcing: Could certain services be outsourced to keep the headcount flat while maintaining efficiency?
- Review what we offer: It’s worthwhile to reassess employee benefits and activities. In older companies, some perks or events are organized out of tradition rather than necessity. Engaging employees to understand which benefits they value can help streamline offerings and free up budget for more impactful areas.
Staying competitive
Budgeting for salary costs is undoubtedly complex, but with the right information, it can be a strategic opportunity. Employees today are well aware of market trends. If average wage growth is 7%, it’s unlikely that your team will be content with a 3.5% increase. To remain competitive, it might be necessary to explore cost offsets like reducing headcount or adjusting other offerings.
While the task is challenging, rethinking how we structure compensation provides an opportunity to innovate. By revising outdated approaches and using a data-driven strategy, we can position our organizations to thrive in an evolving market.