The Right Way to Increase Minimum Wage at Your Organization

On July 18th, 2019, the U.S. government passed a bill to gradually increase the minimum wage to $15 by 2025. This bill also abolishes sub-minimum wage for both youth workers and tipped workers and closes a less commonly used loophole that allows employers to pay less than minimum wage to some disabled workers. This change will impact 26.6% of wage-earning workers and their employers

The hourly rate of labor directly influences your bottom line. As those rates move up, the way you handle your financial operations has to change. You also have to analyze people as individuals and consider their performance, engagement, and information about whether they’re likely to stay or go

Failing to understand this–and worse, failing to incorporate it into your analysis and planning–will cost you more than you think. This is because the formula most businesses use to calculate the cost of wage increases doesn’t present a complete picture of the impact. You must go beyond basic calculations around operational costs and wage change and forecasting out 12 months. 

You need a holistic view of your workforce and your business–which requires you to first gather information from your different systems and then, manually pull it all together to make the best decision possible.

Data visualization showing estimated annual total cost to bring people up to minimum wage level

This means looking beyond just compensation and digging into the data to see how wage changes will impact areas such as:

Job Satisfaction

Some believe that raising the minimum wage will increase job satisfaction, but that’s not true. According to a recent study on the increased minimum wage in Germany, while this boost can lead to an increase in the workers’ pay satisfaction, the research shows that “the increase in job satisfaction is modest and predominantly driven by changes in pay satisfaction implying only a small effect on all other dimensions of job satisfaction.”

Compression 

Employees that are currently paid a rate just above minimum wage may feel slighted when minimum wage employees get a raise. As the floor for compensation moves up, it’s not just the people below the line who feel the impact–the employees who are above the line may also need to see changes. To keep the original structure, everyone’s pay must move up.

Retention

Since all companies will raise their wages as a result of the new bill, some companies have voluntarily decided to pay above minimum wage as a retention strategy. This means other aspects, beyond pay, will be motivating factors when employees make the choice to stay or go. Overall your company culture, scheduling practices, and total rewards package are all things your employees will be keeping a closer eye on. 

Make changes with the future workforce in mind

To make the right changes to your compensation and total rewards packages, you need to consider its impact on your workforce as it stands today and how it could potentially drive changes to your talent planning. Here are a few things to consider. 

Increasing productivity

When wages increase, the question becomes: what can you do to increase productivity in your business? You may want to take a top-down look at your organization. For example, who do you have working in what positions? How can you optimize your workforce to help them get things done faster? 

In some areas, the minimum wage will more than double, so it’s critical to ensure you can maximize the impact of your workforce. You have to choose how many people you want and how they can best execute the activities that are central to your business.

Outsourcing and automation

According to a report from 2016, White House economists predicted an 83% chance automation will replace jobs that pay $20 per hour. Increasing minimum wage makes automation an attractive option for your business since it may also reduce your payroll costs. 

For roles where automation doesn’t fit, businesses may want to consider outsourcing. Choosing to outsource can cut costs on training, recruitment, and employee benefits.

Costs of turnover 

People will have more choices for when and where they want to work with the minimum wage increase. As a result, businesses that already see a high turnover rate have to take a closer look at their own turnover costs and the cost of new hires.

The restaurant industry is a great example to look at when we’re discussing turnover since, in 2016, the turnover rate in the restaurant industry was 73%. While a high turnover rate is common in sectors that employ many workers at a lower wage, turnover becomes even more concerning when you consider the looming increase.

A high turnover rate is more expensive than most realize. According to The Center for Hospitality Research at Cornell University, turnover costs $5,864 per person on average. This is broken down as such:

  • Pre-departure disengagement: $176
  • Recruiting to fill position: $1,173
  • Selection for new hire: $645
  • Orientation and training: $821
  • Productivity loss for all staff: $3,049 

With these kinds of costs and talent planning to contend with, it’s clear that making good, data-backed decisions around hiring and retention are imperative to maintaining positive business outcomes.

Data visualization showing the number of employees projected to be below minimum wage in the next 12 months

Three ways to tackle minimum wage changes

Preparing for the minimum wage increase requires more than just crunching numbers. People analytics enables you to make smarter decisions around minimum wage. An approach that incorporates different types of analyses–or a technology platform that encourages you to explore and dig deeper into your data using best practice questions gives you more valuable information so you can take the best possible action. 

The key is to go beyond the dollars and cents spent as a direct result of the wage increase. Using the three methods below in tandem–think of them as a “good, better, best” approach–will help you understand the way this change may reach other areas of your business. 

1. Understand the full impact

This first step is about getting a baseline understanding of which employees will fall below the minimum wage next year–and the following years up to 2025–and the costs you’ll incur to make these changes. 

Engaging a data scientist to do the predictive modeling will be necessary to plan beyond just next year. Alternatively, you may want to also consider a people strategy platform that has predictive capabilities built-in. 

Most organizations tend to stop once they know how which employees need to move up the line over the next twelve months, but as we’ve mentioned above, there are many other factors that come into play with any wage increase. This is where what-if models come in handy. 

2. Perform what-if analysis to model different scenarios

A what-if analysis allows you to estimate the average hourly rate of your workforce across various positions so you can see the impact on your business as workers–those currently below and above the line–move up together. You can also see how voluntary and involuntary turnover, employee engagement, and other factors may impact your costs over time. 

3. Plan for any changes to headcount and costs

The best method for increasing wage–once you’ve got your baseline metrics and what-if scenarios–is to build a workforce plan that factor in your total headcount, wages, and operational costs. This way, you can figure out the optimal way to move forward with the wage increase by considering all aspects of your business. 

Decisions need to happen at the speed of change

The changes to the new minimum wage bill will have your board and leadership asking you for more information on its impact over the next five years. More than pulling the data and crunching the big numbers, people analytics will give you the insight and information that your HR organization needs to pivot from reactive to proactive and from tactical to strategic. 

With a people analytics platform like Visier People, you can go beyond saying who’s above and below the minimum wage line. Instead, you can provide your leaders with the context influencing their numbers, generate additional analyses to share, and speak with confidence about your organization’s realities. 

Your talent drives your business’s competitive advantage and understanding the drivers to success–so you can remove obstacles and plan new initiatives–will you continuously give you a fresh advantage.

Author Photo
Wayne Hoy |
Wayne has always had a passion for answering business questions with data. He has been a people analytics pracitioner since 2012 in roles ranging from a front-line analyst to leading a team of them. When he’s not working at Visier to expand the HR analytics solution, he enjoys watching and playing basketball, and he often thinks about cycling to work, but ultimately he rarely ever does.