Jeremy Anderson is Principal of Barney & Barney, one of the nation’s leading insurance brokerages, offering risk management and employee benefit solutions. Anderson is head of the firm’s Compensation Consulting Practice and is located in the firm’s San Francisco office. He points out three key factors to consider when raising employee wages:
- Competitive benchmarking. Employers need to have a clear understanding of market rates of compensation and how current employees compare.
- Performance of the individual. Most companies provide merit increases for those employees that are performing at or above expectations.
- Criticality of the position. It’s essential that employees in critical positions are retained. Proper compensation is key to achieve that objective.
“A company’s performance and financial capabilities will dictate whether there is a sufficient pool of money to increase wages,” says Anderson. “If a company is struggling, the ability to increase pay will necessarily be limited.
In addition, Anderson points out that across-the-board increases to all employees can sometime backfire when star performers see little to no differentiation in their pay relative to other employees. The market norm now seems to be a merit increase budget around 3% of payroll for the year, says Anderson. Some companies also set aside an additional 0.5% of payroll for any required adjustments to pay when an employee is below market/competitive rates.
Most economists suggest that we are on the precipice of accelerated wage growth after seven years of tepid growth, points out Joe Kager, Managing Consultant and founder of the POE Group, a Tampa, Florida-based management consulting firm that advises companies on becoming great places to work by developing reward systems that attract, motivate, and retain employees. Wage increases, as measured by the employment cost index (ECI), have been anemic since the recession in 2008. For the period of 2009 – 2014 wage growth as averaged 2.3% annually. Over the last four quarters of reported data we have seen an increase of 2.6%, says Kager.
The unemployment rate has continued to decrease (currently 5.4% nationally). This is considered within the range of full employment. The number of unfilled positions in the U.S. has climbed to over 5 million in February, the most since 2001.
These factors would suggest that wages should be markedly increasing. However, they have not.
“The likely reason is that there is still a large portion of Americans that have opted out of the workforce,” says Kager, a Certified Compensation Professional with over 25 years experience in compensation and human resources.
Data from the PEW Research Center shows that 37% of the civilian population older than 16 are not in the labor force. That means they aren’t working now but haven’t looked for work recently enough to be counted as unemployed. If this group begins to enter the workforce, the available supply will increase and wage pressures will stay under control. If however they stay on the sidelines, wages will increase.
Actual wage increases in the U.S. began approaching 3% as early as 2012. Since then they have stayed constant.
Say Kager: “Employers have resumed the practice of regular base pay reviews, at a lower level than before the recession. Businesses are not projecting significant wage growth, but instead a slow increase. We believe that other forms of pay are to a degree replacing salary growth. Additionally, the labor market has experienced some transformation with a greater split between high and low paid jobs.”
Wage increase is a factor of the supply and demand for labor.
“During the recession companies cut back on workers, decreasing demand and increasing supply,” says Kager. “The economic improvement has been slow, with companies increasing productivity before adding employees.”
Kager points out that major employers such as Wal-Mart, McDonalds, Target and Facebook have announced wage increases for their lowest paid employees.
“This will cause employers, who compete for similar employees, to react by increasing pay for similar jobs,” says Kager. Also effective in 2015, over a dozen states raised their minimum wage rates. All that adds up to macro and micro factors that go into play when raising wages. Below, Kager outlines a number of factors to consider when raising wages:
Key macro factors in understanding the need to raise wages, according to Kager:
- Your location – Fast developing metro areas more quickly feel a labor shortage than rural locations in the Midwest.
- Industry – Industries that continue to experience substantial growth and demand for employees include computer system design, healthcare and consulting. Those experiencing less growth currently include manufacturing, government, finance and insurance.
- Workforce composition – Companies with a professional workforce will experience a higher demand more quickly than companies that have a high percentage of service oriented positions.
Micro factors to understand the need to raise wages, according to Kager:
- Companies that regularly assess the external competitive value of their salary levels will have a real-time indicator of the need to raise wage rates.
- Resignations for pay reasons are a red flag. However, there are many reasons employees resign besides compensation. Look for patterns and conduct exit interviews to understand the real cause of leaving. Know that pay is the easy reason departing employees often provide.
- New hires are often a great indicator of external competitive wages. If you are hiring employees at higher pay levels than your existing employees your pay system is not effective in maintaining competitive wages for your employees.
- Keep an eye on your top performers. They are often an advanced indicator of potential wage problems in that they are in the highest demand.
It is not all about pay, or more specifically fixed pay.
“Employers who consider all aspects of their reward systems to attract and retain employees will be most successful,” says Kager.
The two most important areas to focus on are learning and growth (coaching, mentoring, career development) and the work environment (work/life balance, leadership, organizational climate).
Beyond wages increases, Wal-Mart announced programs focused on career advancement and fixed scheduling. McDonalds will offer paid time off in addition to wage increases.
Milennials now outnumber GenX and Baby Boomers in the workforce.
“It is well documented that it is not all about higher wages with this group,” says Kager. “They also want work/life balance and the ability to grow in a company.”
Those companies that provide a portfolio of rewards taking into account their workforce demographics and external competitive environment will be most successful attracting, retaining and engaging the employees needed for the future.
More companies are using variable pay to reward their workforces. This has the advantage of not being an ongoing cost item and can be used more selectively, perhaps for top employees.
In addition variable pay plans continue to increase in prevalence of use.
“Employers should consider multiple pay strategies related to the composition of their workforce,” says Kager. “One size does not fit all.”