Starting in 2019, 20 states have risen their minimum wages resulting in increased wages of about $5.54 billion as well as an average pay bump for each year-round employee between the amounts of $90 and $1,300, increasing labor costs for employers.
Combine this fact with the following:
- The results of recent jobs report indicated that 250,000 new jobs were created with a majority of them in private industry.
- The unemployment rate is holding steady at 3.7%.
- Thousands of Americans have apparently been waiting for the right job, or a better paying one, because the civilian labor force grew by 711,000 in October 2018, and four-fifths of them found jobs.
- Average hourly wages rose again and are now 3.1% above a year ago, the fastest increase in a decade.
- Average hourly wages for production-level workers have climbed 3.9% and 4.5% for manufacturing employees, over the last three months.
The minimum wage increase will create a trickle-up impact for other employees. Said differently: if we do not address pay levels at all levels then we will create a wage compression problem for our work force. Your initial reaction is – I do not employ any minimum wage employees in our company – so why bother worrying about this problem?
The issue is that if there is a general bump in pay – starting at the lowest pay scale in the market – it will impact all pay levels and in particular those at each level above the lowest. If we proceed with the status quo (including providing across-the-board same wage increases for all), we may, in fact, be adding to our existing problem of retention and attraction.
What Should Companies Be Thinking About Doing Differently?
- Create/update career ladder and compensation ranges: Communicate with your employees the expectations and opportunities for growth – tied to achievement of certain performance levels, experience and expertise. This can easily be tied into compensation opportunities as careers progress. Setting forth a career guide path, with expected compensation levels, can only assist in attracting, retaining, and motivating employees. Furthermore, this ladder should focus on evaluating the pay increase among wage levels and focus particularly on middle-wage workers. The impact varies from level to level and the wage gap is closing somewhat between minimum-wage and middle-wage workers.
- Review all bonus, incentive and commissions plans: Plans and payout levels created several years ago may no longer be suitable. Across the board, same-level bonuses will not assist in retaining top performers. Think: Are Performance Measures still reflective of the overall business strategy and are Performance Benchmarks still reasonable with the ideal stretch but not impossible targets?
- Consider altering the process of merit increases: Is there sufficient spread between a top performer’s wage increase and an average employee’s?
- Contemplate internal pay equity: When looking across the organization, are similarly situated positions being compensated in a consistent and supportable manner?
- Evaluate pay equity: Legislation is sweeping across the country with the focus for employers on being able to defend that your pay practices do not discriminate. Keep this process at the forefront when making any changes.
- Is it time to ask: Is it time to review your total compensation programs and total compensation philosophy? The cost for total compensation (base pay, incentives, benefits, retirement, time off, etc.) is significant. Is there a better way to reallocate these resources, in an alternative fashion? Compensation in all forms is a critical component of attracting and retaining talent, at all levels. Critical components of total compensation include (in order of average cost):
- Direct pay
- Paid time off
- Statutory benefits
- Retirement Plan benefits
- Ancillary benefits (life, disability, vision, etc.)
Organizations with excess costs in areas not fully valued by employees will find it difficult to attract and retain employees. Without diligence, it is possible that employees may perceive a total compensation program which costs more than average as below average; resulting in the employer being viewed as non-competitive by the marketplace.
The development of a sound total compensation program includes:
- Framing the program within the strategic plan of the organization.
- Benchmarking all components of total compensation against targeted competitors and industry norms as well as regional norms.
- Identifying critical groups of employees.
- Determining employee priorities.
- Addressing budgetary issues, including current situation and targeted budget levels.
- Designing the program to maximize perceived value, within budgetary realities.
Once the above are addressed, the total compensation program can be assessed and alternative designs can be presented for consideration. If one area (such as wages) is increased, less must be utilized for other components – like a salary cap structure in the NFL, which has negative consequences if a team overpays a running back. Remember: piecemeal approaches have historically proven to fail. Understanding how each piece of a total compensation puzzle fits together, with pre-established objectives and priorities, will yield better bottom line results.
The author wishes to acknowledge the support provided by Emily Stutzman (Dickinson College ’19) in writing this article
Elliot Dinkin is president and CEO at Cowden Associates, Inc., specializing in helping corporate clients find the best solutions, both for the enterprise and its employees, with regard to compensation, healthcare benefits, retirement and pension issues, and Taft-Hartley fund consulting.
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