Higher Wages, Value Creation and Work Design

The path to value creation, according to a noted private equity executive in a recent Harvard Business Review article, is through return on invested capital (ROIC).  Indeed, the best way to create real value in a business -- he says -- is by making smart investment decisions.

This should interest us, as HR and reward professionals, for a few reasons.  First of all the obvious one: that the biggest category of investment for most organizations is employee compensation.  Secondly, because proactively managing that investment to maximize return -- and create real value -- ought to be top of mind for any of us who fancy ourselves "business partners."  Thirdly, because it bears directly on a compensation topic that is capturing a lot of attention these days: companies that are coming forward to voluntarily raise the minimum wages of their employees.

Aetna is one of a number of organizations (including the likes of Starbucks, Gap and Walmart) who've made this move -- and distinct in being a financial services firm rather than a retail enterprise.  The company announced in January the increase to increase Aetna's minimum wage to $16 per hour.  The move will impact 5,700 employees and result in an average pay increase of 11%.

There are a lot of things to like about this movement, and certainly the companies at its forefront are benefiting from the press and goodwill their announcements have generated.  From my viewpoint, one of the positives is that these decisions -- being self-imposed and presumably a product of internal analysis and consideration -- are more likely to be sustainable over the longer term.  That isn't to  say that there will be no unintended consequences to offset the positives as these actions ripple through the labor market.  Our economic system is way too complex and has too many levers being jiggled to assume otherwise.  There seems a greater likelihood, though, that they can be successfully absorbed, managed and even turned to advantage by the "host" organizations.  Because ultimately, a move to disrupt the cost structure of an organization must work to the advantage (or at minimum, not to the disadvantage) of all stakeholders to be sustained over the longer tem.  This includes but is not limited to all members of the workforce, owners/investors and customers.  All these are seeking their own returns, intangible as well as tangible, and their expectations cannot be ignored.

Many are referencing the efficiency wage theory -- the notion that simply paying workers a higher wage should lead to increased productivity -- as the rationale for these wage-boosting decisions.  Perhaps this can be banked on, but I would submit that the astute among this vanguard (and I suspect they are all astute) have actively considered and are pursuing steps to maximize the positive return of these enormous investments.  One of these is likely work design.

And that's where we come in.

Work and job design has long been an orphan, a second-class citizen largely ignored by the HR and reward professions.  As a discipline, it has only been pursued with seriousness by industrial engineers.  There may be lessons to draw from their work but few of today's jobs -- even at the front lines of retail service -- are purely mechanical in their execution.

As those with responsibility for managing our organization's compensation spend and doing so to maximize the return on that investment, many of us should be looking at an opportunity to embrace work design.  I'd wager that the examples of Aetna, Starbucks and Gap are being discussed in many of your boardrooms.  If moves like this are being contemplated, you have an opportunity to provide leadership and expertise.  Who better?

A number of my clients are already involved in work and job redesign efforts, particularly at the lower wage end of their organizations.  The redesigned jobs will pay more -- significantly so in some cases.  You won't see their names splashed across the pages of the Wall Street Journal.  They aren't doing it for the PR benefit but because it makes good business sense.  And HR is leading the effort.

If proactively lifting the wage floor is going to be a thing for enlightened organizations, I'd sure like to see us driving the train ... or at least sitting near the engine.

That's my point.  Your thoughts?

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force,  and Managing Partner of Altura Consulting Group LLC.  Ann also serves as past President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

Image "Dollar Growth" courtesy of hywards/FreeDigitalPhotos.net

Comments

[E. James (Jim) Brennan]

Agree, but have too many thoughts for a short response, Ann. See my next article.

[Ann Bares]

LOL Jim - had too many thoughts for a short post, so we're even. Look forward to next article.

[E. James (Jim) Brennan]

Hey, I'm not so dumb as to skip a perfectly great opportunity to pile on to a wonderful topic!

[Jacque Vilet]

Since we all know the pros and cons of increasing minimum wage, instead of a re-hash of this it would be nice to see a post that is written assuming that it will happen and addressing what we as Compensation pros can do to mitigate any negative consequences.

[E. James (Jim) Brennan]

Although this article did not focus on the minimum wage, which is only one aspect of the topic, a simple search under "minimum wage" or "minwage" will reveal many CompCafe articles offering both cautionary warnings and responsive advice. Ann addressed a much larger issue.

Work Design is an excellent mechanism for amortizing minwage increases and adjusting for the inevitable ripple effects. It also offers tremendous opportunities for HR/comp/TotalRewards activism in creating and enhancing both human talent value applications and their employee value propositions. See the next article!

[Ann Bares]

Jacque,

Jim's right - we have covered that, to some extent, in a number of posts I think ... but no reason not to pull it together in a singular soliloquy. Go for it!

Jim,

I think you've made my point better than I did - thanks for the reinforcement!

[Jacque Vilet]

Ann --- My response was not directed at you -- reading it now it sure seems that way --- but was not intended. I just think that like it or not, it is here and we need to figure out how to cope with it. I'm sure CFOs are trying to figure out the impact to labor costs in their area of expertise. The horse is out of the barn. Talking about who should have been watching it and why the lock failed won't change the facts.

[Ann Bares]

Jacque,

Funny, I thought I was doing exactly what you're advocating here -- but I am clearly not doing it very clearly.

I'm not intending to, nor even particularly interested in, rehashing the minimum wage debate. What I'm interested in is what these handful of companies are proactively doing - and what we (as HR and especially reward professionals) could be doing to not only lead the movement but use our unique expertise guide it more surely to a win-win-win kind of success.

Again - see Jim's comment above, because he is summarizing my point better than I am, I fear.

Thanks for the discussion.

[E. James (Jim) Brennan]

Perhaps the linkage here is the lamentable fact that creating jobs of minimum value causes low (i.e., minimum) wages to be paid when people will accept these positions. We can't stop people from taking jobs that don't pay enough to live on, but we can and should shape work assignments into combinations that can legitimately command better (higher) wage rates than the legal floor amounts called "minimum wages."

The implications of doing that are quite interesting...

[Amy]

Thanks, Ann, for reminding us that we are empowered to steer the ship away from the rocks. We need to unhinge ourselves from the notion of optimal job design based on lowest cost, and instead think about optimal job design for dollars spent. How many times do we do this on an ad hoc basis as comp professionals? "Oh, this is the candidate we need to bring on and these are the salary requirements ?" "Ok well then the job needs to be redesigned". So thank you for pointing out our value and our opportunity.

[Ann Bares]

Thanks, Amy. What a great comment - and observation!