Does the opportunity cost of your employees also increase by 10% in January?

As we know, in Belgium, we apply a wage indexation system. In other words, when inflation increases, wages also increase to protect employees' buying power. A unique system that only a couple of European countries use.

Consequently, the total salary cost of companies in Belgium has increased significantly in the past 12 months. On top of that, there will be another increase of approximately 10% in January 2023.

VOKA expects the average salary cost in 2022-2024 will increase by 21% or 23 billion euros. This is much more than in most European countries, creating a competitive disadvantage for Belgian companies. Consequently, the profitability of a lot of companies is under pressure.

Quite some companies have already decided not to give additional salary increases or bonuses to keep their costs under control.

But that's not the clue of this article.

The big question is: you must pay your people 10% more, and what do you get in return?

To be honest: in most companies I know, the answer is clear: NOTHING!

Employees who are confronted with bad leaders are not fully engaged. Several studies have proved that.

Low engagement means that your employees don't care about the company anymore; they are not enthusiastic about their work; they don't show passion about their job and the company; they don't care about the company's future. Therefore, the energy and effort they want to spend on their career are decreasing.

Most employees (in Belgium, at least) are pretty risk averse regarding job mobility, so they stay in their job (read: their golden cage). This is the so-called quit quitting which you can read extensively in the press.

In other words, you pay their full salary but don't get their full potential. Their actual performance is (much) lower than their potential performance.

That's what you call an opportunity cost.

A recent study by Gallup comes up with some shocking numbers on the cost of non-engaged employees:

• 37% higher absenteeism rate
• 18% lower productivity
• 15% lower profitability (due to negative customer experience – remember: unhappy employees mean unhappy clients)

According to Gallup, this creates a cost equivalent to 18 to 34% of their annual salary. A yearly salary cost of 75k means an opportunity cost between 14k and 26k (per non-engaged employee).

For a company with 1,000 employees, 80% are not engaged (the average, according to Gallup); we are talking about 16 million euros per year (on average).

An increase of the salary cost by 10%, due to the wage indexation, with the same level of employee engagement, means that the opportunity cost also increases by 10%! You throw an extra 1.6 million euros out the window in the example above.

This calculation doesn’t even consider the cost of employees who leave because of bad leadership. The society for Human Resources Management has calculated that the average price to replace one employee equals 6 to 9 months of salary cost.

That sounds like an excellent idea!

One action point for you: work on your leadership!

Good leaders make people more engaged. It’s as simple as that.

Here are three simple steps to go through:

1. Define what a ‘good leader’ is for your organization
2. Compare your current leadership with the norm of a ‘good leader’
3. Take action to close the gap by offering decent learning & development for your leaders.

Do you want to compare the costs with the benefits of learning & development?

Suppose you know that in the US (no data available for Belgium), companies spend on average of 1,678 dollars per employee per year on L&D, and you compare this with the cost of non-engaged employees. In that case, the business case is easily made.

I am sure this is the most straightforward business case you had to make in your career. Nevertheless, I still see a lot of companies that prefer to keep throwing money out the window.

The most commonly heard excuses are:

• The business is doing well; why should I change something?
• Look how successful we have been; we have the best leaders
• With the current crisis, we have to cut costs!
• We have other priorities for the moment ...
• If we work harder, it will get better.

Are you interested to discover how business mentoring can improve your leadership and help you reduce your opportunity cost? Find our mentoring services.