Thought leadership

Minimum Wage Movement: Is it Too Late to Be Proactive?

Minimum Wage Movement: Is it Too Late to Be Proactive?

The movement in the United States to increase the minimum wages paid to workers continues to gain momentum. The number of organization looking to increase their minimum wage grows as lawmakers pass new legislation regarding mandatory increases.

Organizations that had not previously looked into increasing their minimum beyond the legally required rate may soon find themselves scrambling to increase rates. The window to maximize employee good will is quickly closing for these organizations that would like to be seen as proactive and not reactive in the marketplace.

Is it Too Late?

Your organization heard the rumblings about minimum wage increases but chose not to look at the issue because there are so many other things going on. Now your competitors down the street put up a billboard advertising their starting wage is $14 an hour. Your lowest paid jobs start above the state and federal minimum wages at $10. Your recruiting staff has always had trouble hiring people in these lower level positions, and suddenly the positions higher in the grade scale are becoming difficult to source. There is a general perception that a number of employees are leaving the organization and turnover is increasing.

The call to action is growing as organizations face similar scenarios across the country. Yet, it isn’t too late to reverse the flow and make the most of the situation.

How Not to Do it   

Setting a compensation philosophy as part of the bigger picture of total rewards is a good first step.  Any organization looking to raise its minimum wage is adopting a philosophy that is striving to pay an above-market premium to its workers. Unfortunately, this situation is changing and soon the organization will simply be paying its workers at the “new market.” It’s important to avoid dramatic wage compression by increasing the hourly wages for employees who may already be above the new established minimum wage along with those below the new minimum wage.

Because the organization has fallen out of the lead on this issue, some leaders may feel a temptation to rush to action. One approach we have seen from organizations that wish to address this before legally required to do so is to increase all of the employees to the new minimum wage immediately and make no further adjustments, as shown in the chart below:

 

 

Total EEs

Avg. Rate

New Minimum Wage

Avg. Increase Given

Avg. Increase as %

Total Cost

Employees Below New Minimum

100

$11.27

$13.00

$1.73

15.35%

$359,840

Employees Above New Minimum

2,000

$27.15

$13.00

$0.00

0%

$0.00



What is the next step for the organization when it completes these adjustments? Yes, the 100 employees who receive an average $1.73 an hour increase are happy for now. But what about the employees who currently are making $13 an hour after a few years’ worth of increases with the organization?

The organization chose to make no further adjustments to address any potential equity issues created by the adjustment. Their thought was to perform this adjustment as a reset and then allow their traditional merit increases to handle the compression issues.

This view can be extremely shortsighted because the next merit cycle may be months away and typically features increases ranging from 2 percent for average performers to 2.5 percent for top performers. If the program operated properly and rewarded employees each year for their performance and tenure, the average increase of 15.35 percent that employees received wiped out more than six years of merit increases that their tenured counterparts in the organization may have received.

The organization dealt with backlash from this adjustment in the weeks and months following the announcement. The initial messages from management surrounding the change discussed the merits of increasing the minimum wage to ensure the positive impacts of everyone making a living wage.

Unfortunately, each employee’s situation and ability to benefit from the change is different.  A $15 minimum wage goes further for an individual than for an employee trying to support a family. The latter concerns centered on the demotivating actions taken by the company to strip away merit increases earned by tenured employees. Why would an employee put in extra effort if the company might just wash everything away the next time the minimum wage increases?

We Modeled it Correctly; Now What?

Dynamic modeling and careful planning can help your organization achieve its compensation program goals. The important question is: what’s next? Did your organization make the adjustments to minimum wage and equity off cycle? If your merit cycle is approaching, do you plan to apply the merit cycle to all employees, including those who may have just received an increase? Does it make sense for an employee who just received a 15.35 percent increase to receive another merit increase?  If not, how long should the employee wait until the next increase?

Clear and thorough communication is key.  Generally, employees are excited when their organization gives them an increase. There are times when employees who receive large increases question the intentions of their organization and ask why they were “underpaid” for so long. If the organization chooses to make minimum wage and equity adjustments off cycle and then allow employees to participate in the merit cycle, it may set a tone for increases that will be tough to match in the future. If the organization chooses not to include those who received minimum wage or equity adjustments in merit, than it should include that information in the communications in order to manage employees’ expectations.

Organizations find themselves in various stages of this process; yet regardless of what stage they are in, they need to anticipate what may happen next. The short- and long-term effects of the push to higher minimum wages are important to the organization’s planning process. 

Considering Potential Short-Term Effects of Increased Minimum Wage

Increases to higher minimum wage will show up in salary surveys. These increases will drive up the market rates in the lowest positions first, potentially in the next two to three years in major metro areas. Organizations can attempt to limit these additional costs by reducing grade widths in their structure, limiting the growth at the top of the grade range and minimizing midpoint progression of the grades. HR leaders may even go as far as consolidating grades at the bottom of the structure into fewer grades.

Increased discipline with less deviation from the structure will become more important as compensation teams implement these changes to reduce equity and disparate treatment issues.

Employees may see a base pay increase, but working hours available may become more limited. Organizations should include all employees in the merit cycle, especially if leaders choose to withhold increases after minimum wage and equity adjustments. Employees may see a reduction in other pay opportunities, such as shift differentials, overtime, and bonuses as more money is pushed to increasing their base rate. Employees may look elsewhere if communication isn’t effective and they don’t feel the organization has their best interests in mind concerning the evolving wage process.

The organization will see added cost because of these changes, so it needs to take credit for its actions taken on minimum wage and equity adjustments for employees. Establishing a merit cycle and sticking to it will help employees understand that organization has their best interests in mind. To offset some of the additional cost, productivity must increase.

Organizations should look for other savings within compensation, including premium pay (shift differentials, overtime, call pay and bonuses). However, leaders should proceed with caution. By limiting certain premium pay practices offered to employees, a company may create a situation in which the organization needs to increase FTE count to cover the changes. Yet increasing head count may offset or even negate the intended savings. Leaders must prioritize ongoing communication to employees about the compensation and total rewards philosophy to maintain engagement.

Planning for Potential Long-Term Effects of Increased Minimum Wage

Positions traditionally above the minimum wage, $15-$25 per hour, will start to see potential movement in the compensation surveys. As the market data levels out, the structures will need to adjust again. Organizations can maintain the minimums that increased in the short term at the lower end of the structure, but begin to increase the starting point of grades not affected by minimum wage changes. Over time, slow increases to the maximum of the ranges affected by minimum wage adjustments may be warranted.

Employees will advance to the grade maximum sooner because of the reduced grade range widths. This may cause more employees may receive a lump sum award, which in turn may allow employees to realize the need to advance their knowledge and value to the organization to continue to receive pay increases.

Leaders should continue communication to employees about the compensation and total rewards philosophy, as well as review the program annually to ensure it is working as designed. Ongoing equity analysis and market adjustments as part of the defined merit cycle will help prevent problems before they get out of hand.
 

Balance Short- and Long-Term Effects to Avoid Preventable Issues  

Organizations must carefully navigate the short- and long-term impacts of minimum wage change as they prepare for the future. Self-inflicted increases in turnover and vacancies, and reduced employee engagement and customer service, are preventable.

Learn more about strategies to maximize organizational wellbeing. Contact Gallagher’s Human Resources Compensation Consulting Practice to assist you with minimum wage modeling, annual assessments, market benchmarking, strategy, and total rewards needs — to help your organization face the future with confidence. Contact Tom Wardrip, Tom_Wardrip@ajg.com or visit gallagherhrcc.com.

Tom Wardrip

Tom Wardrip is a Senior Consultant with Gallagher’s Human Resources & Compensation Consulting practice. Mr. Wardrip has comprehensive management experience in the service and health care managed services industries. 

 

EXPERTISE 

During his time in the service industry, Mr. Wardrip was a part of growth organizations and participated in the rollout and management of new locations where his focus was hiring, training, and process improvement. His time in the managed services industry continued his focus as a turnaround ...

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