Waves of recent strikes by fast food workers protesting minimum wages have ignited a fierce debate in this country about the meaning of fair, just compensation.
There’s no doubt that payroll is always going to be one of your biggest expenses and stresses and it’s the key to many things: your company’s bottom line and efficiency, your ability to recruit and retain A-player employees, and your reputation. Pay too much and you might go out of business. Pay too little and you open yourself up to a whole host of problems.
After all, chances are that you are not a McDonalds or an Albertsons, large enough to pretty much go right on doing whatever you want regardless of what anyone has to say about it, and large enough to absorb the very real cost burden associated with high turnover and low morale.
Employees will tell you, however, that fairness is incredibly important to them. Compensation and notions about what makes it fair are somewhat subjective exercises. However, there are guiding principles that you can use to steer your company in the right direction.
Fair compensation considers the market rate for each position.
The market rate isn’t really a bad guide for most positions and most employees are well-informed about market rates because they’ve taken the time to look them up.
You don’t necessarily want to pay right at the bottom of the scale. For example, according to Salary.com a retail sales clerk is likely to make anywhere from $7.25 an hour to $13.96 per hour. Sure, you could get away with paying the minimum, but you’re not likely to produce an employee who feels they are being paid fairly. Instead, edge closer to the middle. Costco is often lauded for paying its employees a starting wage of $11.50 per hour. Notice that they didn’t need to swing all the way to the top of the market rate payment scale to reap the benefits of employee loyalty, not to mention a great deal of positive PR.
Fair compensation is livable.
Employees are giving you the best part of their time when they give you forty hours a week. Nobody is asking you to support a caviar habit. However, an employee can’t be faulted for expecting that he or she should at least be able to afford to feed, buy clothes, and shelter a family in return for that time. They may only be able to afford basics on low-level jobs, but if you want to offer fair compensation then make sure those basics are affordable. The living wage calculator can help you make these decisions.
Again I’d have to point to Costco: their wages are considered liveable. However, they’re only paying their employees $4.25 over the bare minimum. You don’t really have to break the bank to make this happen.
Again, you can take a “why should I worry about this, it’s their problem” mentality if you want to but you’re never going to earn loyalty that way. It’s also a short-sighted attitude. You pay far more whenever an employee leaves. For example, the Center for Economic and Policy Research turnover calculator estimates the cost to replace one minimum wage worker at $15,745.00.
Let’s imagine for a moment that you lose 3 unhappy employees in a month. You’ve just cost yourself $47,245 in turnover costs for one month. In contrast, the employee who makes $11.50 an hour only costs you $1,840 per month, plus tax. Paying $47,245 per month to save $680 a month is the epitome of being “penny wise and pound foolish.”
And in many cases, the cost of setting fair employee wages barely impacts profits at all. Albertsons could afford to pay its workers $14.96 per hour without raising prices even one cent. Arguably, they’d make more profit, as many of their workers would turn right back around to do their shopping there and could afford to buy more.
Fair compensation is transparent.
Out in the trenches, the secrecy surrounding wages breeds suspicion and resentment. If you want people to suspect you’re not being fair, just keep it all hush-hush.
It’s better to have a structured pay scale that everyone understands. Make sure the rewards and milestones are clear so that people understand what they’d have to do in order to earn more pay. Clear goals, objectives, and rewards are gamification principles that have been shown to really impact and motivate employees. There are a lot of companies that have put these principles into action.
I spoke with a company about this before and their response was that it’s best to stop negotiating. Do you really want to pay someone more just because they’re good at talking you around? Most of the jobs you are trying to fill don’t really require shrewd negotiation skills, after all. Keep it simple by ensuring that everyone’s getting paid the same wage for the same work.
If you have to raise the pay for one class of employee, it’s usually better to bite the bullet and raise wages all across the board. That way valuable executives aren’t getting paid less than entry-level workers simply because the market shifted a little bit.
You should also be transparent about the external factors that are leading to your pay decisions. If you’re a start-up company with very little revenue then you’ve got some decent reasons for hovering near the lower end of the market rate for each position. If you’re bringing in $425 billion in revenue, however, don’t expect your employees to believe that you’re being fair to them when you choose to pay the bare minimum.
Photo: “The Office: Working on the final layer” by Emily @ go haus go is marked with CC BY 2.0
