Wages & Benefits Costs Are Climbing: Here’s How to Stay Competitive Without Breaking the Bank

When it comes to labor costs, it’s been a tough year for businesses, many of which are facing the dual challenges of escalating wages and the rising cost of employee benefits. 

The Employment Cost Index (ECI), a measure of total costs of employment including both wages and benefits, rose 0.9% from Q3 to Q4 last year, representing a total year-over-year increase of 4.3%. This upward trend is born out of an intensely competitive labor environment (note that unemployment fell to 4% in January 2025) where offering attractive compensation packages is now non-negotiable for successfully attracting and retaining top talent. 

At the same time, employees are themselves grappling with increased living costs due to inflation, diminishing the impact of higher salaries. A recent survey from career website Zety revealed that half of U.S. workers feel unable to start or expand their families on their current income, 40% are unable to save for retirement, and 37% cannot afford to buy a home. In other words, even as compensation is costing employers more, their generosity is having less impact given the ever-rising cost of living. This makes a challenging situation that much harder to manage without related recruitment and labor costs spiraling. 

To navigate this situation without overextending budgets, CoAdvantage recommends the following strategies:

Strategies for Reducing the Cost of Employee Benefits

1. Embrace Flexible Work Arrangements

Offering flexible work options, such as remote or hybrid models and adjustable schedules, can be a cost-effective way to enhance employee satisfaction. A sharp increase in RTO (return-to-office) mandates notwithstanding, workers love flexibility. As a result, RTO programs may be inadvertently creating opportunities for competitive differentiation in the talent marketplace. The MIT Sloan Management Review spells it out: “Organizations that embrace flexible work will steal talent from organizations that impose harsh return-to-office mandates.”

Flexibility really seems to work: a Conference Board survey found that 71% of respondents with a mandated on-site work policy were struggling to retain workers, compared to only 46% of employers who offered flex policies to workers. 

2. Optimize Existing Benefits Programs

Reevaluating and restructuring current benefits can lead to savings in the overall cost of employee benefits while maintaining employee satisfaction. 

For instance, data indicates that traditional paid time off (PTO) programs offering three weeks of leave cost employers an average of $3,465 per employee annually. In contrast, unlimited PTO programs average $3,234 per employee, potentially reducing costs, if only incrementally. While unlimited PTO may not suit every organization, the point is to think creatively about how current benefits programs are structured and organized to ensure maximum impact at minimum cost.

3. Use One-Time Incentives 

Providing one-time benefits, such as signing bonuses, can attract talent without committing to long-term financial obligations.“[S]igning bonuses remain vital for recruiting workers,” Indeed economist Cory Stahle wrote in a January 2025 report. “Utilizing signing bonuses — in addition to offering benefits and/or employee flexibility like hybrid or remote work — may be good alternatives to stand out in the hopes of recruiting workers without committing to long-term wage increases.” 

One-time incentives offer immediate rewards to new hires, can be very appealing, and can be tailored to current budget constraints—without increasing future financial obligations.

4. Leverage Technology for Efficiency 

Investing in technology and automation can streamline operations, reducing the need for unnecessarily manual labor, additional staff, and other associated costs. While the initial implementation may require significant investment, the long-term benefits include increased productivity and lower labor expenses. Brendan Duke, senior director for economic policy at the Center for American Progress, notes, "How you use those tools is important, and I think the hard part about automation is that it’s always less efficient to begin a new process. But it can lead to better things at the end of the road."

5. Invest in Employee Retention

Focusing on retention strategies can mitigate the high costs associated with turnover and recruitment. Plus, enhancing employee engagement through recognition programs, professional development opportunities, and addressing management issues can foster a positive work environment. It’s not rocket science: Employees who feel valued and see opportunities for growth are more likely to remain with the company, reducing the need for costly hiring processes. For more information, read our guide on "Preventing Employee Turnover.”

6. Partner with a Professional Employer Organization (PEO)

HR outsourcing through collaboration with a PEO can grant businesses access to comprehensive benefits packages at more competitive rates. PEOs pool employees from multiple companies to negotiate better benefits and insurance premiums, offering small to mid-sized businesses advantages typically reserved for larger corporations. Additionally, outsourcing payroll, benefits administration, and compliance tasks to a PEO can alleviate administrative burdens, allowing internal teams to focus on core business activities. New to PEOs? Check out our short intro guide, “What is a PEO?”.

The key point: PEOs help to reduce costs. In fact, PEOs can reduce employment-related administrative costs by hundreds of dollars per employee.

And don’t underestimate the benefits of PEO-powered tech-enablement here either. “The HR environment is constantly changing, with rising costs and new employee expectations,” says Stacey Cadigan, a partner in Human Capital Management at consultancy Information Services Group (ISG). “Organizations that partner with providers can survive and thrive by adapting to these conditions with the help of technology-enabled solutions.”

Just make sure you understand how to choose a credible PEO that has the internal resources to deliver on these cost efficiencies and reduce the cost of employee benefits. 

How to Choose a PEO

Selecting the right PEO involves careful consideration of several factors:

• Industry Recognition and Reputation: Choose a PEO that is well-regarded within the industry and demonstrates a strong history of client satisfaction.

• Service Offerings: Evaluate the range of services provided to ensure they align with your company's specific needs. 

• Technology Platform: A user-friendly and efficient technology platform can streamline HR processes. 

• Cultural Fit: The PEO should align with your company's culture and values for a harmonious partnership.

While rising wages and benefits costs present significant challenges, adopting some combination of strategic approaches can help businesses remain competitive without compromising financial stability. By embracing flexible work arrangements, optimizing benefits, offering targeted incentives, leveraging technology, focusing on retention, and HR outsourcing to the right PEO, companies can navigate the complexities of today's labor market effectively and efficiently. 

CoAdvantage, one of the nation's largest Professional Employer Organization (PEOs), helps small to mid-sized companies with HR administration, benefits, payroll, and compliance. To learn more about our ability to provide high-powered, cost effective benefits options, contact us today.

**The information provided on this website is for general informational purposes only and does not constitute legal advice. While we strive to ensure the accuracy and completeness of the information, we make no guarantees about its correctness, completeness, or applicability to your specific circumstances.  Laws and regulations are subject to change, and you should consult a qualified legal professional before making any decisions based on the information provided here.