Compensation Cafe

Friday Special at the Cafe

Every Friday, we make it our business to find a terrific compensation/reward oriented blog post from the past week from somewhere outside the Cafe, and highlight it here.  This week we point you to Mike Haberman's HR Observations blog, and his recent post Getting Punished for Trying to Do Good.

Mike does us all a service by reminding us about a particular set of fine print in the FLSA (Fair Labor Standards Act); one requiring that any non-discretionary bonuses awarded to nonexempt employees must be allocated over the time period to which they apply and then included in overtime calculation.  He does this by sharing the story of what happened when one well-meaning employer inadvertently ran afoul of this requirement.

From Mike's post:

QuikTrip, a Tulsa, Oklahoma based convenience store chain, has agreed to pay out $750,000 in overtime payments that the U.S. DOL said were due employees because of a violation of the Fair Labor Standards Act. By just looking at the headline you might think this is the "standard" case of a company working employees off the clock or not counting time they worked. Well if you thought that you would be very wrong. This case has to do with a company trying to do good things for their employees and rewarding them for their good work.

QuikTrip has a bonus system based upon a secret shopper program. Employees are rewarded for extra good work based upon their ratings in the program. What an excellent thing to do! However, QuikTrip got caught in a making a mistake that many companies probably don't even realize they could make too. In fact when I talk about this in the SHRM prep classes I teach most people are agast. The mistake that QuikTrip made was in giving nonexempt employees non-discretionary bonuses! Because if you give nonexempt employees non-discretionary bonuses you have to use that in your overtime calculation for the period of time that was covered by the bonus.

Click through to learn more about this FLSA requirement ... and then be sure to check out Mike's follow-up posting on the topic as well.

HR Observations is a great source of HR related news, trends and developments - explained by a seasoned and savvy HR professional.  If you aren't already subscribed to Mike's blog, I recommend you do so today.

Have a great weekend!

Time Away Can Improve Productivity

I'm writing this week's post while I'm on vacation.  So I thought I'd write about the restorative power of time off.  I know that not everyone is wired the same way and some people don't seem to need time away from work; but most of the people I know need time to recharge their batteries so they can function at full capacity.

Businesses pay employees for their output and also frequently their knowledge.  Sometimes employees get tired and both output and the ability to think clearly start to suffer.  The other thing that I see when employees haven't had any time off in awhile is that teamwork can also suffer.  Employees spend 8+ hours per day working together, and these groupings aren't necessarily people that were chosen because the personalities worked well together.  Sometimes people just need a break from each other so they can work together again. 

Time away doesn't always have to be a full vacation, sometimes lunch can be enough.  One of the perks of my job is the open space right across the street.  This is an actual picture of the place where I spend most of my lunch breaks.  Because all companies have been forced to tighten their belts and because of my skill set; I also have the responsibility for the HR analysis at my company.  More than once, I've been stuck on how to write a complicated formula to extract data from the system.  Also more than once, I've left it and gone for either a walk or run at the Davidson Mesa Open Space.  Pretty much every time while not even really thinking about it, I've come back with a solution that works perfectly.  Stephen King has also written before about times when he's been stuck in a story so he goes for a walk and returns with a solution to his storyline.

So while we don't usually think of time away from work as the most productive time, many employees actually need this break to be their most productive.  So if you or your employees need that time off, make sure to take it and you'll usually be rewarded with an improved outlook and productivity.  I know I'm planning on going gangbusters when I get back to work on Monday!

Darcy Dees works as the Compensation Manager for Rock Bottom Restaurants, Inc., headquartered in Louisville, CO.  She has been working in Compensation for over 5 years now and recently attained her Certified Compensation Professional (CCP) designation.  She spends what little free time she has hiking and reading.

Images:  Taken by Darcy at Sullivan's Island, SC & Louisville, CO

Managers: The Next Critical Skill Shortage

Recent research predicts a shortage of qualified managers in the future and reveals some reasons as to why this might be so.

The tenth annual World of Work Survey, a study of 2,199 employees and 833 managers from Randstad (site link to survey not yet available) examined some of the causes of this projected lack of managers and found:

• 49% of those with the experience to become managers don’t want any part of it

• 50% of Baby Boomers (age 45-63) and nearly 70% of Matures (age 64+) said no to the prospect of becoming managers.

And why are these folks saying "no" to being a manager?

• Increased stress is the No. 1 reason for 82% of employees surveyed.

• Generation Y (age 18-29) cited handling disgruntled employees as their No. 1 reason.

• Other reasons why employees of all ages don’t want to become managers include having to deal with increasing paperwork (63%) and having to terminate or layoff employees (63%).

This is not good news.  First line managers still play a critical role in most organizations; acting as the primary conduit between workers and the employer.  If employees today - and tomorrow - are increasingly put off by this responsibility, how do we respond?

• By redesigning our organizational structures to accomodate fewer management roles?

• By changing the nature of the role itself to make it more attractive to would-be managers?

• By raising the compensation sufficient to make an increasingly tough job more economically appealling?

• All of the above?

Are qualified managers at risk of becoming an endangered species?  What's your take?

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC,where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School, enjoys reading in her spare time and is currently awaiting her daughter's return from China.  Follow her on Twitter at @annbares.

Hewitt Associates Predicts 2010 Healthcare Premiums To Be In Double Digits Again

In mid-July, Hewitt Associates released their preliminary report predicting that once again, HMO premiums will increase by a whopping 11.8% in 2010.  This projected increase is consistent with last year's projected rate increases, yet is down from 12.2% in 2008.  Final averages increases of 9.0% are expected after plan changes, negotiations, and terminations.

"While HMO rates continue to outpace inflation and underlying health care trends, employers have been increasingly successful in reducing these costs by 3 to 4 percentage points over the past few years through plan design changes, cost shifting and negotiating aggressively with health plans," said Maureen Fay, a principal and co-leader of Hewitt's HMO rate analysis project.  "Given these challenging economic conditions, we expect to see employers continuing to implement similar-if not more aggressive-strategies for 2010."

The rates in the Southwest are expected to be the highest at 14.0%, essentially doubling almost 100 percent from 2009.  Conversely, the Western states are expected to have the lowest premium increases of 11.1%, down from 12.0 % in 2009.

"There are a number of reasons why HMO premium increases may fluctuate across regions, including variances in demographics, health risks, and plan designs," said Jeff Smith, a principal and co-leader of the HMO rate analysis project.  "In the Southwest for example, we weren't surprised to see higher than average rate increases for 2010 because plans in this region needed to make up for revenue and margins they lost from lower-than-average rate increases in 2009."

Even though employers have worked hard to contain healthcare costs during the economic repression, most are considering additional strategies to help alleviate the impact of these projected HMO rate increases.  They are:

1). Consolidating vendors or exploring options to self-insure.  Consolidating vendors enables employers to better analyze their claims data to implement the right healthcare strategies needed to address underlying health risks, conditions, and utilization patterns according to their employees' demographics. In considering self-insured plans, employers are allowed to customize the package of healthcare programs to meet the specific needs of their covered population allowing cost containment.

Hewitt's report also identified that some employers are eliminating HMO plans altogether.  According to their data, 56.6% of employers offered HMOs in 2009, down from 59.1% in 2008.  Apparently employers are promoting PPOs and HSAs as a more cost-effective healthcare solution to their employees.  It's interesting to note that HSAs are non-existent in the proposed healthcare reform legislation that's under consideration in both the Senate and the House of Representatives.

2). Aggressively negotiating with health plan providers.  Employers who have harvested their claims data are using that data to aggressively negotiate with providers.  Employers that have moved their prescription drug benefits for HMO enrollees to one centralized plan are able to use drug claims data to identify health risks in their employees, and utilize proactive care management practices to control costs in chronic conditions.

"Most employers are taking a hard stance in negotiating with health plans.  They are saying, "either partner with us to cut our costs or we'll eliminate your plan altogether," said Fay.

3).  Changing plan design.  The trend by employers to increase employee costs is ongoing, with increased co-pays ramping up to a greater proportion.  Larger employers are shifting from a co-pay to a co-insurance model, by example, moving from a $15 office co-pay and $250 hospital co-pay to a $200 plan deductible followed by a 90% co-insurance for all services. 

More employers are also conducting dependent audits to remove plan costs for dependents who don't qualify for coverage based on the employer's eligibility requirements.  Hewitt reported that more than two-thirds of their clients have completed this type of audit, have such an audit in process, or are considering conducting this audit.

4).  Improving employee health.  This continues to be a focus for employers, with fully 65% actively engaged in wellness programs with their employees.  Chronic illness drives rates higher, so if employers can motivate their employees to lose weight, stop smoking, control blood pressure and exercise more, they can have a "win-win" outcome by improving their employee wellness while controlling costs.

"Chronic health conditions have become a major workplace issue that impacts the overall productivity of a company," explained Smith.  "And since chronically ill employees and their dependents account for at least half of companies' overall health care costs, employers have a vested interest in helping these workers optimize treatments for their conditions."

Our own Compensation Cafe contributor Margaret O'Hanlon recently wrote a thought-provoking post on this clash between healthcare needs from a chronically ill employee population and the costs of providing that level of coverage in "How Pay & Healthcare Benefits Collide." 

While I'm not a fan of the proposed healthcare reform that's now being proposed by the Obama Administration, I do believe that some sort of reform is needed. Recognizing that we have the best healthcare system available in the world, we should work to retain what's working well in our current system and fix what's not. 

What are your solutions to control costs and fix healthcare? It's clear we cannot continue to sustain these double digit increases in healthcare premium costs year after year.....

Becky Regan is the founder and President of Regan HR, Inc., a human resources consulting firm specializing in compensation consulting for California employers and purveyor of online HR products. A former Corporate Human Resources Director (10,000+ employees) with more than 25 years of HR work experience in many industries, her team works with private, public and non-profit clients.  Becky is passionate about designing HR programs and compensation plans that build organizations.

How Pay & Healthcare Benefits Collide

I just read a few studies that have rearranged my assumptions about health care costs, for myself and for employees. Instead of hearing a buzzing in my ears from the eternal antics in D.C. about the reform effort, I am now listening more closely.

I’ve always known there’s real money involved, but healthcare costs have always seemed to have a random quality to them that made insurance the best solution.  With a few exceptions like pregnancy, healthcare coverage is meant to address random risks, right?  Risks that our salaries typically can’t stand up to – that’s where insurance comes in.

At a projected 2.2%, the 2009 corporate salary budget is smallest in the 36 years of WorldatWork’s Salary Budget Survey. While we struggle with how to use such small amounts to reward hard work, we should also recognize that these small annual salary increases may be immediately eradicated by the money that employees are laying out for health care.  Especially lower-paid employees.

I’m going to make this personal for a minute. Prescriptions and tests continue to get more costly.  And instead of a one-off event, they seem to be becoming a regular part of my annual budget.  I thought the trend could be accounted for because I was of a “certain age.”  And my fair skin is now getting testy about those terrible sunburns I got as a kid. 

But, it turns out, my notion is actually a national trend, one which challenges our long held mindset about the job that health care coverage is meant to achieve.  Here’s some attitude-changing insights from a recent McKinsey Report (which I was able to connect with via the Daily Stat from Harvard Business Publishing).

“The fundamental nature of medical risk in the United States has changed over the past 20 to 30 years—shifting away from random, infrequent, and catastrophic events driven by accidents, genetic predisposition, or contagious diseases and toward behavior- and lifestyle-induced chronic conditions.  Treating them, and the serious medical events they commonly induce, now costs more than treating the more random, catastrophic events that health insurance was originally designed to cover . . . What’s more, the number of people afflicted by chronic conditions continues to grow at an alarming rate.”

They also reminded us of the history that most of us who have been trained in benefits consider fundamental.

“This misalignment is a relatively recent phenomenon. Insurance is effective if it pools random, infrequent, and unpredictable risks. When health insurance was introduced, in the 1930s, it did precisely this. Over the decades, however, it expanded to cover an increasing array of services, largely because employers wanted to attract workers by providing a tax-advantaged benefit.”

While these short quotes address too many complex issues in a nutshell, you get the drift.  With chronic conditions, the need for healthcare is no longer a crap shoot that insurance companies struggle to predict.  Our behaviors and lifestyle are causing the need for a whole different type of financial protection. Financial protection that you thought was part of your insurance coverage, but doesn't really belong there -- so you are increasingly chipping in for out of your own pocket. 

How big a collision are we talking about between pay and healthcare costs?  Well, a separate McKinsey Report called, “How health care costs contribute to income disparity in the United States” gave a direct answer.  Here’s an excerpt:

“The top-income category (earning on average $210,100 annually) has enjoyed rising incomes and growing employer-paid health care benefits, which have made their out-of-pocket spending on health care a relatively small and affordable portion of total spending. The higher-middle-income category (earning an average of $84,800 annually) and the lower-middle-income group (earning on average $41,500), have also seen increasing benefits and incomes—but at a much slower rate, making the uncovered portion of their health care costs ever-more expensive. In the bottom-income category (earning an average of $14,800 a year), incomes have been stagnant, and their employers are less likely to pay for their health insurance. This group is finding any health care difficult, if not impossible, to afford.

As part of a study of widening income gaps between US households, we found that rising employer-paid health insurance premiums constitute a growing share of the combined income of lower-paid employees—a much larger share than for those who are higher paid. For those workers within the bottom-income group who are insured (22 percent), the ratio of employer-paid premiums to household income is 20 percent. That compares with 3.3 percent for the top-income group, in which nine out often workers are insured . . .”

Increasing number of chronic conditions with an increasing number of regular charges.  Less income to pay the bills.

Granted that this is all very complex and still not fully understood, but for years now we have talked with employees about Total Rewards. We have talked about the link between pay and benefits as a way of integrating all of the ways that your company provides rewards and recognition. We have hardly ever talked about how Peter (your salary) keeps you from robbing Paul (your health care), although I have had clients that put that thought into their strategic Total Rewards planning.

Put your employee hat on.  Given your own health and income, how do you feel about these findings?  Then don’t forget that in the stark light of 2009 budgets, employees will get mixed, confusing (and perhaps, indifferent) messages if you think about pay and benefits separately when planning your budget allocations and employee communications.

Margaret O’Hanlon is founder and principal of re:Think Consulting.  She has decades of experience teaming up with clients to ensure great Human Resource ideas deliver valuable business results.  Margaret brings deep expertise in total rewards communication to the dialogue at the Café; before founding re:Think Consulting, she was a Principal in Total Rewards Communications with Towers Perrin.  Margaret earned her M.S. and Ed.S. in Instructional Technology at Indiana University.  Creative writing is one of her outside passions.

Objectivity: A Lost Skill

When I was first starting out in Compensation I was told how important objectivity is.  It’s common sense to me.  I’ve been told for many years, “You’re one of the most objective people I’ve ever met”.  It’s a compliment I never tire of hearing and reflects my efforts to be objective.  Objectivity is not a skill just for Compensation practitioners, but for every person, regardless of position, level or vocation.  

I’ll admit, there have been times when my objectivity slipped a bit, like the day someone in management said “that’s crap” about a project I’d worked very hard on.  I’m proud of myself for things I didn’t do or say in that situation.  I can look back now, and know he’d misplaced his objectivity that day, as did I in reaction to his words.  

In order to provide the best service (or product), we need to be objective.  I had a wise teacher in high school who gave us some emotive topics to discuss to prepare for in-class debates.  He walked around the classroom listening to our group discussions before separating us on to debate teams.  We didn’t choose our teams, like we thought we were going to; he divided us into teams where some of us had to defend the opposite of our beliefs.  Most of us walked away with a better understanding of and tolerance for opposing views and a lesson in objectivity.  

Do you think it was easy for Switzerland to remain neutral (objective) towards war faring nations (as per the 1815 Vienna Conference) during World War II, especially given their size, physical location, military power and economic dependence on it’s neighboring countries?  No.  However, their neutrality was respected by those involved in the conflict for the most part.  

We have to work at being objective.  It’s not easy ... to take the incumbent out of a job when we’re auditing, evaluating or marketing it, or perhaps a bias about an employer a candidate works for when hiring, or personality when doing a performance review or a disciplinary action, or a bad experience with an insurance carrier when marketing your benefits plans, or a frustration over something we don’t understand or... the list goes on.  It's not easy, but it’s necessary.  

Every day each of us face decisions that affect other people’s lives.  Our guidance and our ability to provide an objective, well reasoned approach to a situation, enables success.  

Next time you’re in that position, take a few steps:

• clearly identify and articulate the goal(s)
• develop strategies to overcome obstacles (roadblocks)
• be accountable and/or hold others accountable for the goals (whichever is appropriate)
• step outside and/or have others step outside the comfort zone in order to achieve the goal(s)

Objectivity is not a lost skill.  There are times we get caught up in the minutiae or the  emotions evoked by what’s happening and our objectivity falters or fails.  However, let’s ensure that we don't allow our skill of objectivity to get rusty or be forgotten; its positive impact is too great.

The more we use and develop a skill, the more natural and automatic it becomes.  

May you have many opportunities to practice being objective and enable success!

 

Terri Albee, CCP, is managing partner of HR Ops Team LLC, which provides scalable and affordable human resources services, ensuring human resources structures are in legal compliance, streamlined for funding or exit events, or just optimized for day-to-day operations.  Terri has planned and managed HR operations in a variety of industry verticals from start-up organizations to the Fortune 500, domestically and globally.  Her experience encompasses design, implementation, compliance and management of compensation, benefit and equity plans at all levels.

Where are You on the Transparency Continuum?

Where is your organization on the compensation transparency continuum?

It's an especially relevant question in today's world of instant access to just about anything. For those of you working in the HR/compensation field for more than 15 years, you probably remember when pay data was only something that small number of people in your organization ever saw or knew existed, and it was kept in a locked file cabinet. Today, pay data is everywhere (of course, a lot of it isn't particularly valid, but that's a post for another day).

Some organizations are remarkably open about their pay programs and pay philosophy/strategy, while others remain tight-lipped about anything related to how compensation is determined and communicate accordingly.

Today, while reading an excellent white paper on the subject put out by the folks at KnowledgePay, it got me thinking that its time for the more closed organizations to re-think the whole openness and transparency issue.

Openness and transparency, while similar concepts, are not exactly the same. Openness refers to the degree that the company is “willing to open up” with regard to the details of its compensation philosophy, strategy and program(s).  Openness is more of a strategic issue that HR and senior executives struggle with (what, and how much do we communicate?). 

"Transparency refers to the degree that program participants can “see” how their compensation program works and how it impacts them.  Openness certainly contributes to this, but transparency goes a step further, referring to what we call the “what’s in it for me” question (“WIIFM”).  All rewards-related communications (base pay, incentive, benefits, etc.) efforts should keep the WIIFM question in mind as the communications plans are developed and communicated.  It’s really the one question that virtually everyone thinks about when you communicate to employee groups about anything pay related." (Base Pay Toolkit, 2009).

Research has shown that greater openness and transparency can create greater levels of trust, which is a desirable state for any organization. For instance, studies done by Watson Wyatt have shown that companies with greater levels of management/non-management trust have achieved significantly higher levels of total shareholder return than organizations that have low levels of trust.

Am I arguing for total openness and transparency?  Absolutely not!  But I am trying to argue for enough openness and transparency to foster understanding, greater levels of trust, and so employees can answer the WIIFM question for themselves.

Here's another perspective from another Ann Bares, one of our fellow Compensation Cafe' bloggers: "A lot of the debate about pay transparency is misframed.  Too often it is focused on what employees are paid and the idea that employee pay data should be made more public.  This is not transparency - this is an invasion of privacy. An appropriately transparent pay program is one where we have communicated with employees the why and how of the organization's pay practices." (Ann Bares, Altura Consulting Group).

My feeling is that if your organization has built a competitive rewards program based on sound principles and analysis, what's to hide?  Share the news!

So, in today's' world of instant communication and information accessibility, what is the "right" or "correct" amount of information that should be shared with the workforce?  Ultimately, that's up to your organization's comfort level, but we do know that greater openness and transparency, it is likely that your organization will help to foster healthy levels of trust, and likely a stronger ability to attract and retain the talent you are seeking to move your organization forward.

Doug Sayed is founder and principal at Applied HR Strategies, Inc. a compensation consulting firm based in the Seattle Area.  Doug is a Certified Compensation Professional (CCP) with over 20 years of HR and compensation experience.  He earned a Master’s Degree in Human Resource Management from The Ohio State University.  He is an instructor for WorldatWork, and lead author of the upcoming “hands-on” compensation resource, the StrategicPayTM Series, Base Pay Toolkit.

Friday Special at the Cafe

Every Friday, we make it our business to find an interesting compensation/reward oriented blog post from the past week from somewhere outside the Cafe, and highlight it here.  This week we point you to Steven Roesler's All Thing Workplace blog, and his recent post Kill Change With Too Many Priorities.

Steve may cover "all things workplace", but I find many of his ideas and insights have very direct implications for measuring and rewarding performance.  In the post we showcase today, Steve discusses a research study which examines why many U.S. businesses are so unsuccessful at effecting change.  The reason?

Managers have so many priorities at once that they can't tell what's important and what isn't.

Ring any bells?

As Steve relays it:

Although change projects are given top priority at most companies, almost half of the more than 500 managers surveyed said that a significant number of such projects failed to meet the stated goals.

The #1 reason given for failed change initiatives was having too many "top" priority projects and an inability to coordinate and integrate these across their organization

This is an important point for compensation practitioners, as our efforts and programs aimed at measuring and rewarding performance often fall fictim to the "everything is a priority" syndrome.  Reward programs are most powerful and effective when they are used as a mechanism to focus attention on imperatives.  But if everything is an imperative, nothing is an imperative, because there's only so much attention to go around. 

To drive his point home, Steve shares a personal anecdote:

Sitting in a conference room not long ago, I watched an executive trying to get guidance from his CEO: "I've got no less than than twelve initiatives going simultaneously. Which should I really focus on?"

The CEO answered, "Yes", and sat silently. He thought it was a clever response.

We'll see what the results yield.

For workplace wisdom, you really can't beat All Things Workplace.  Click through and read the rest of Steve's post ... and be sure to put his blog on your regular reading list.

Have a great weekend!

Scenario Planning: Reward Design in an Uncertain World

Compensation planning - like life in general - got a lot tougher this past year or so.  And as we move into what has traditionally been the pay budgeting and planning months, many of us are wrestling with where (the heck) to take our reward plans amidst today's economic uncertainty.

Perhaps we can borrow a technique from the business planner's toolkit.

Scenario planning, pioneered by the military in the 1950's and long used by some of the world's largest corporations, involves identifying a small number of "scenarios", predictions or possible paths the future might take, and defining how to potentially respond or adapt to each of them.  It should come as no surprise that recent times have brought a new surge in popularity for this particular planning approach.

An article in this week's Knowledge@Wharton, Eyes Wide Open: Embracing Uncertainty Through Scenario Planning, talks about this resurgence and covers some of the challenges involved in doing scenario planning effectively.

From the article:

Trying to gain a better understanding of the trends shaping the competitive environment has always been critical for managers. In the 1970s, scenario thinking first became relatively popular as a structured way to look ahead -- to understand new growth areas, anticipate risks, spot opportunities and build a long-term vision. Perhaps most notably, Royal Dutch Shell used the approach to look more broadly at the trends and developments that could impact the price of oil and develop stories that could challenge management perceptions. Since then, however, companies of all sizes and in many industries have picked up the practice, particularly at times of crisis or dramatic change.

George S. Day, a professor of marketing at Wharton and co-director of the Mack Center, also has witnessed the recent rise in scenario thinking firsthand. "What has changed to make scenario planning so timely? Obviously uncertainty is way up. This is the main driver, because when conditions are stable it's easier to live with momentum and the projections we normally use," he points out. "The challenge is that when things are very uncertain we need to think differently, because what we project based on current momentum may be the least likely outcome. We need to start thinking about the unthinkable scenarios -- and what's new today is people are finally figuring out how to do it well, in an environment with a huge amount of uncertainty."

My point? Simply this question: Are there elements of scenario planning that we - as a profession - should be embracing as we try to position our reward plans to support success in a future that is difficult to predict? 

Let's face it.  The days of simply plugging a new budget number into our compensation program and rolling it forward with a few tweaks are behind us.  Looking forward, we may need a dramatically different process that considers our reward structure against the possibilities the future may throw at us ... and asks questions like:

• What are the boundaries of possibility for our organization in the coming year ... and beyond?

• What might the possible scenarios mean for how we manage and reward our employees?

• What direction should/would we move our reward plans to respond to these realities?

• What, if anything, do we do today to ensure we would be appropriately positioned to make these moves, if circumstances demand them?

I'm betting that there are some forward-thinking practitioners out there who've already incorporated questions like these into their compensation planning efforts.  The rest of us ... time to learn up and get on board.

Ann Bares is the Editor of Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting services to a wide range of client organizations.  She earned her M.B.A. at Northwestern University’s Kellogg School, enjoys reading in her spare time and is waiting for her daughter to return China this summer.  Follow her on Twitter at @annbares.

Image: Creative Commons Photo "It's about rules and strategy" by pshutterbug

Minimum Wage Increase Results in Job Losses.... Or Does it?

Tomorrow — July 24^th — the Federal Minimum Wage will increase to $7.25 an hour from $6.55, a more than a 10 percent increase.  

If you believe such a raise will cause job losses, there are statistics to support that point of view. There are also statistics supporting the other side. So, who’s right?  

For those ready to jump on the Obama administration for this increase and it’s poor timing in conjunction with the recession and recovery, don’t forget this increase (and it’s selected effective date) was passed in 2007, and this is the third increase in three years.  

Is the timing of this increase unfortunate?  Maybe. Conservative economists think so, while many more liberal economists think it will potentially increase spending.  

The impact will depend on a number of factors, including the minimum wage in your state, the local economy, the unemployment rate where you live, the kind of job or a combination of any of these and even other factors.  If you’re in a state where the minimum wage is higher than the federal minimum wage (which is true in more than half the states), the impact will probably be less as employers have already adjusted their hiring practices with consideration given for the state minimum wage.  Locales where there is high unemployment may feel a greater impact if job losses come as a result of wage hikes, and the same impact would occur anywhere wage rates come in to play as a criteria for job elimination.  Some employers will also reduce hours and benefits for workers at the new minimum wage to lessen the total financial impact on their bottom line. Overall, economists who study these changes are saying the largest groups that will be affected by the increase in the minimum wage are those ages 16-24 and those in low-skilled jobs.

A positive impact for those in low-skilled jobs who keep their jobs is that they will take home about $1,450 more per year.  To the millions of people impacted by the increase, this may mean several months of rent, car payments, groceries or utility bills, or the ability to pay down debt or money to put in savings they wouldn’t have otherwise had.  Seventy cents an hour may not be a lot in some eyes, but its a 10.7 percent raise and is roughly five times the size of the average increase (2.2 percent) in 2009.  

Additionally, an upward push for jobs paying slightly above minimum wage (e.g., $9/hour), usually occurs. Pay scales are quite often adjusted to keep these jobs at a similar difference in pay from those at minimum wage.  If this adjustment doesn’t happen, those employees may be demotivated or demoralized by being paid at or close to minimum wage again. 

While I’d like to believe in what the more liberal economist say, for those included in the two largest groups, the likelihood of fewer job opportunities is real.  There are companies who will forego filling an opening they may have had, or eliminate (more) positions, because they cannot afford the additional financial burden, which includes wages and other payroll-related expenses such as Worker’s Compensation & FICA. As a former small business owner in the food service area, I paid more than minimum, but increases impacted me because of my philosophy of staying ahead. I can tell you that such increases impacted my ability to increase the size of my staff or replace open positions.

Hang on — it’s going to be an interesting ride.

 

Terri Albee, CCP, is managing partner of HR Ops Team LLC, which provides scalable and affordable human resources services, ensuring human resources structures are in legal compliance, streamlined for funding or exit events, or just optimized for day-to-day operations.  Terri has planned and managed HR operations in a variety of industry verticals from start-up organizations to the Fortune 500, domestically and globally.  Her experience encompasses design, implementation, compliance and management of compensation, benefit and equity plans at all levels.