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How does the changing minimum wage affect your compensation strategy?

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Mykkah Herner, M.A., CCP, PayScale

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:

  1. 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?
  2. 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?
  3. 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.

Some suggestions

  • 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.

7 Comments

  1. 7 bill 27 Jun

    iv just returned from austraila on a trip that I won the minimum wage is 16 per hr it cost me and my wife 26 dollars for a mc donelds meal housing is exspensive gas is 8 dollars a gallon  every this is outrages .they had to raise rages to keep people from leaving the city to go work in the mines but the higer wage just raised all other prices supply and demand should be the motive prices and wages not people with there hand OUT

     

  2. 6 Jennifer 26 Jun

    If minimum wage is raised drastically, then laws around inflation will have to be put in place as well.  I think looking at geographic locale and Executive pay practices are both necessary for business sustainability, but in the end if a combo meal goes up to $14.00 and milk, bread, butter, etc. go up $2-3 a piece with Gas pricing constantly on the rise, raising the minimum wage will not help.  Unfortunately some (or many) companies will be forced out of business if they are unable to raise their prices, but a fair inflation rate must be set alongside a wage increase in order for minimum and/or low waged employees to survive and support their families.

  3. 5 Charles 25 Jun

    Perhaps I'm just dense, but Karen, what relationship between C level compensation and entry level pay exists that makes this the  "no-brainer" as you have stated?    

    It's popular to harp on the obscene amounts paid to Fortune 100 CEO's, but using those amounts as justification for an increase across the board to minimum wage is specious.  

     What about the hundreds of thousands of small to mid-sized businesses that don't see that large of a pay gap?   I work in a mental health care company of just under 150 people.  Our starting unskilled wage is  45% above current minimum wage because that's what it takes in our market to get people to do the job.   Our CEO makes less than six times the wage of a full time entry level person and just 10% more than our top clinical people.  An increase in the minimum wage like what is occurring in Seattle would raise our labor costs by 30% or better in a people service organization.   Because of state mandates, we can't cut the number of employees so our options would be to raise prices accordingly or cease operations.  

     So go ahead and raise minimum wage to $15 an hour and then wonder why a combo meal at the fast food place costs $14.75.  Some jobs aren't meant to be used to support a family.   Then they'll want it raised to $30.  

    Mykkah, an option exists that you didn't list and that is to relocate the business operation to a locale that is more business friendly.

  4. 4 Karen 25 Jun

    Given all the reports stating that the increase in CEO wages isn't aligned with increased performance of C level work, raising the minimum wage seems like a no brainer.  Compressing the earnings spectrum seems reasonable to me.  The lower end of the spectrum likely has less experience negotiating.  It's just unfortunate that the pay spectrum has gotten so out of hand that the compression needs to be mandated as the mandates will hit smaller companies that already run lean hardest.  

  5. 3 Laura 25 Jun

    Good suggestions, but it's unfortunate that we even have to address how to handle the effects. Who doesn't understand the increased wages will either force companies out of business or will force an increase in the cost of goods and services. Either people will have no wage, due to losing their job, or they still wont be able to afford things because of increased costs.

  6. 2 Julie Stewart 25 Jun
    Great article, really informative and thoughtful.
  7. 1 mark 25 Jun
    wow, we will survive but be much leaner...

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