There are a number of positive impacts to hiring when wages go up, says Sunny Ackerman, Vice President and General Manager for the West Division of Manpower, a human resource consulting firm that provides recruitment and assessment, training and development, career management, outsourcing and workforce consulting services.
“Employers and recruiters can more quickly source and pipeline talent because job seekers are more interested when wages are competitive or above market average, especially for the entry level workforce,” says Ackerman.
At Manpower, Ackerman says the firm sees a greater ability to retain people during a project or client engagement if wages are competitive or above market.
Does it mean less people get hired? That’s not a trend they’ve seen at Manpower. Higher wages have many benefits, including reduced time-to-fill, higher productivity and lower turnover, says Ackerman. Manpower data shows that associates paid more than $10 per hour are less likely to leave an assignment early, and they work two weeks longer on average. This equates to reduced down-time for Manpower clients and less time and money spent on onboarding and training. There are also negative impacts of low wages.
Looking at Manpower data, low wages equate to increased overtime – 11 percent higher for associates paid under $10/hr.
“We find that paying a higher wage on the front-end can lead to larger cost savings on the back-end,” says Ackerman.
Do companies alter their hiring strategy when wages rise? It doesn’t dramatically change a client’s workforce planning, says Ackerman. However, addressing stagnant wages with pay increases is a relatively newer trend, so time will tell if it does in fact influence workforce strategies, he adds.
Increasing the Minimum Wage and the Wal-Mart Effect
It’s interesting to note that Wal-Mart and McDonalds also announced planned improvements in career opportunities and paid time off, respectively, points out Ackerman. These changes will likely go farther to increase employee satisfaction than the proposed wage changes.
“The trend to increase wages is spreading and made significant publicity with companies like Wal-Mart, Starbucks, McDonalds and Target addressing stagnant wages,” says Ackerman. “As a result, we have seen many of our small- to mid-sizes clients ask for more data and information to support this trend – they want to know the facts and be informed. They are starting to understand what many large employers have recognized – that in order to attract the best employee’s, a competitive wage must be part of the employment package.”
Joe Kager, Managing Consultant of the POE Group, Inc., a Tampa, Florida-based compensation consulting firm, points out that twenty states raised their minimum wage effective in 2015. Like Ackerman, Kager referenced major employers such as Wal-Mart, McDonalds, Target and Facebook announced wage increases for their lowest-paid employees in recent months.
However, this will not cause an increase in wages throughout the workforce, says Kager.
“Yes, the lowest-paid workers will receive a one-time gain in compensation and companies who employ workers at or near the minimum wage will need to react to Wal-Mart by increasing pay,” says Kager. “Companies with entry-level jobs in retail and food service will be affected. This will have little to no effect on higher paying jobs that are compensated above the new minimum wage levels.”
According to ManpowerGroup’s 2015 Talent Shortage Survey, 1 in 3 employers report they are experiencing difficulty filling jobs due to a lack of applicants with the required skills.
“As labor markets continue to tighten in the U.S., it is becoming more challenging for employers to find the right talent,” says Ackerman.
This understandably puts pressure on pay. According to the Bureau of Labor Statistics, wage growth jumped 2.8 percent in the first quarter of 2015, the fastest gain in pay since 2008, as benefit costs continue to moderate and the labor market continues to improve. That means wages are now growing faster than in 2004 and 2005, and significantly faster than the 0.7 percent productivity gain in 2014.
5 Pay Strategies for Companies Going Forward
Labor markets are going through structural changes that call for different approaches from pre-recession strategies, says Kager.
“Compensation programs should align with the changing conditions,” says Kager, who offered these five pay strategies for companies to consider:
- Overall wage pressure should remain muted as the slack in the labor force further engages with growing job prospects. General wage increases will not return to pre-recession levels for quite a few years. However, companies should be conscious of their specific industry wage trends.
- Employers should consider potential wage changes differently for different segments of their workforce. The historical data suggests that higher-paid jobs have seen greater pay increases than lower-paid jobs. Whether this is a socially appropriate strategy is a separate question.
- Although still constrained, wage increases have accelerated since the recession.
“Companies should ensure their salary management systems are externally competitive,” says Kager. “No organization wants to lose its high performers to competitors because its pay isn’t competitive with the market.”
- This is a great time for companies to consider a variable or incentive pay plan to complement their base pay programs. Merit increases will likely average 3% for the foreseeable future. It is difficult to reward top performers in a constrained fixed pay environment. Utilizing incentive pay has the advantages of not increasing fixed costs and tying potential rewards to desirable business outcomes.
- Although competitive wages are certainly an important reason employees remain with organizations, they are not the only reason.
“Companies should consider enhancing their efforts in career growth and performance management, building an engaging company culture, and providing work/life balance,” says Kager. “These factors are most significant in retaining employees.”