There has been a lot of talk about increasing the minimum wage, at the federal, state, and city levels. In Seattle, headquarters of PayScale, we just passed an ordinance increasing the minimum wage to $15/hour within 3-7 years depending on employer size. Of course there has been debate on both sides of the law. Can small business owners afford to absorb the increase? What will happen to the people we used to pay at $15/hour? But also, how can Seattle call itself a forward-thinking city if the minimum wage is not a livable wage? I probably should have been born a Libra because I fundamentally understand both sides.
Rather than debate right and wrong, I thought it might be more helpful to get into main considerations employers should have as we move forward to implementing the new minimum wage laws.
Compliance and related considerations
As with other legislation that touches on compensation, like health care requirements, exemption status, and say-on-pay, the first consideration for compensation and HR professionals is always compliance. Attend an annual seminar on updates to legislation in your area. Get on an email list that keeps you posted regularly on any updates to existing or new legislation. Talk with your fellow compensation, benefit, and HR professionals online or face-to-face to see how other folks are handling compliance issues. In the case of the minimum wage changes, the primary questions are the following three:
- How do we handle compression?
The number one question I hear practitioners asking now is “what do we do with our existing employees at that level?” If you have employees that are currently making $8/hr who will be bumped up to $10/hr for compliance, what do you do about those who were making $10/hr?
- What do we do with our pay structure?
The next set of questions I’m hearing from clients has to do with pay structure. Do we have to bump up all our ranges starting from the minimum wage now? If we do that, how do we avoid overpaying people at the higher levels?
- How does it impact my overall budget?
The third main question is “how are we going to afford this?” Most employers I’ve worked with recently have either just started doing increases again, or are looking forward to doing so soon. They’ve been prioritizing paying out those increases to their top performers for retention purposes. Increasing minimum wage workers to new minimum wages will take a bite out of the pool of money they are hoping to dedicate to the positions that really drive the business forward. At the same time, I’ve heard and understand the argument that without our line workers, no work would get done.
- Examine your structure – how many grades will be overlapping when you move those below minimum wage up to minimum wage?
- Consider adjusting the distance between grades so that overall your structure retains the same number of grades, but the vertical distance between lowest and highest grades becomes slightly compressed.
- Most of the proposed laws have a transition period. Calculate how many employees are below the minimum wage for each year of the transition period so that you can dedicate the appropriate budget to bringing those employees into compliance annually.
- If your structure shifts upwards for higher level positions because of those at the base of the structure, focus your budget first on bringing minimum wage workers into compliance before beginning to calculate equity adjustments. The second focus for your (diminishing) increase budget would then go to your stellar performers before turning to equity adjustments.
- Over time, stay current with market data. It’s not likely that the higher positions will shift immediately upwards, but they will likely shift over time. Eventually, you’ll need to re-examine your structure to stretch out the distance between grades again.
- Decide on how you want to message your strategy around compliance with the minimum wage laws. Find the right way to use it to your advantage and brag about it!
Ultimately, I think that if we collectively get to a place where we’re not killing off small businesses, we’re paying teachers appropriately, and we’re still rewarding people in the right ways for the right work, then it’s a pretty darn good idea to pay people a living wage.
Need help with setting salary ranges? This eBook can get you started: How to Build Pay Ranges.