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Compensation Insights

Separating Pay Signals from the Noise

Pay programs When to adjust pay levels is one of the most important questions an organization may face. Considering that employee compensation is 60% to 70% of an organization’s operating costs, making the wrong decision can increase costs substantially, and sometimes even unnecessarily.

These compensation costs are something executives should keep top of mind right now. High profile companies seem to be announcing pay increases nearly every week, particularly for lower-level employees.

At the same time, public debate about raising minimum wage continues to ebb and flow. Many jurisdictions have increased, or are considering increasing, the minimum wage, in some cases significantly. For example, businesses with operations in SeaTac, WA, must pay the highest minimum wage in the country – $15.00 per hour. 

But what does this mean for your organization? Does all this activity create pressure to raise wages, even if you are not legally mandated to do so?

Right now, unless you are operating in a state or city that has increased minimum wage above your current pay levels, the increases are unlikely to have an immediate impact on your organization. This is not to say there will be no impact in the future. However, there is plenty of time to sort out what is going on and understand how the trend towards minimum wage increases will impact the labor market and pay levels.

Beyond the Media Frenzy

Announcements of rising pay – whether through legally mandated minimum wages or voluntary increases by individual organizations – grab a lot of headlines. However, the media are not the market. Headlines alone don’t change market-based wage rates.

Here’s why:

First, most companies announcing wage increases are consumer-oriented (think Wal-Mart, Target, and McDonalds). Their wage increase announcements are as likely to be brand-burnishing as they are competitive adjustments. Companies that are not consumer-oriented would not benefit in the same way by taking similar actions.

Second, the announced increases are unlikely to move the market for competitive pay significantly. Many of these increases are slated to occur over time, lessening their immediate impact on the market. While there could very well be changes to rates in the future, employers have time to think through whether and how to respond.

Finally, while being a good corporate citizen is important to most organizations, needlessly increasing wages isn’t necessarily in anyone’s best interest. Overpaying employees can be just as much a threat to the business as underpaying employees. Unnecessary increases could lead to equally unnecessary price increases that customers may not tolerate.

Stay Calm and Manage Your Compensation

Recent events reinforce the need for organizations to ensure their compensation levels are competitive, relative to the market. “Set it and forget it” is not a valid compensation philosophy. Maintaining competitive pay is a delicate balancing act. Pay too much and it hurts the business by reducing profitability. Pay too little and it hurts the business when key talent moves on to better-paying opportunities. Companies need to channel their inner Goldilocks by maintaining wage levels that are “just right.”

Indeed, dealing with any changes resulting from wage increases should simply be part of overall compensation management. Every day, businesses face changes that impact operations and adjust accordingly. The same should be true of compensation. Organizations should always have a good sense of whether compensation programs and salary levels are appropriate and working as intended. That way, when something does occur to change the situation, executives can become aware of it as quickly as possible.

If employees are using the highly publicized increases to push for their own raises, employers can use the situation as an opportunity to communicate about their rationale for current wage levels and the process used to develop them.

The same is true if the pressure is coming from managers and other executives. These individuals are a crucial source of compensation information on the line and need to understand how things stand and why. In turn, these managers and executives can relay the correct information to the employees in their areas.

Of course, if an organization is having difficulty attracting talent or has experienced unusually high turnover, a more robust look at the compensation system may be in order.

The takeaway: Take action and adjust wages based solely on what is best for the health and success of your organization. Without that, everyone loses.