How to Prepare for Rising Minimum Wages & Pay Compression

How to Prepare for Rising Minimum Wages & Pay Compression

Organizations across all industries will have to raise wages for their lowest-paid workers sooner or later. Competition in the labor market and local, state, or federal mandates will make this pay adjustment necessary, and many employers are already working out strategies to comply ahead of time. However, raising the minimum wage introduces another headache—pay compression. Keep reading to learn more about this topic.

Preventing Pay Compression

You should budget for the cost of correcting wage compression since it can cause churn out among your most loyal and longer-serving employees. As you raise the base pay, you’ll want to avoid narrowing the different pay levels already in place. These pay gaps exist to stimulate career progression, so it would be wise not to eliminate them.

So, once you’ve raised the minimum hourly rate to $15 or higher, employees who are already above this rate will expect a commensurate pay raise, too. You can adjust the pay structures at once or in phases, depending on your budget.

Consider merging several job-position levels into one while preserving some of the pre-existing pay differentials. For your employees, this will keep compensation as a motivation to earn job promotions and grow careers.

Other Effects of Base Pay Increases

Any change in the minimum wage will necessitate adjustments in other financial perks that your lowest-paid employees are currently receiving. If there are incentive payouts, those will rise, too. Other forms of compensation that will be impacted include:

  • Unemployment insurance payments
  • Social security and retirement plan contributions
  • Medicare contributions
  • Higher profit sharing

In a nutshell, employers should budget to remit larger amounts into retirement safety nets and other social perks that accompany compensation. Likewise, employees who receive pay hikes should start anticipating changes in their tax obligations. Higher wages may move some of them out of their current tax credit brackets.

If some of your low-wage employees are receiving certain incentives based on their pay, you may want to move the incentives over to fixed pay. Instead of offering a percentage commission based on the hourly rate, it may be more affordable to eliminate the variable component of the compensation. Many workers earning $15 an hour wouldn’t mind a fixed salary calculated this way.

How to Prepare for Minimum Wage Changes

Now is the time to start planning for compression correction once you implement a minimum pay hike in your organization. You should also contemplate and budget for the potential implications beyond the base pay. Important considerations include:

  • Involving top management in making key decisions related to minimum wage and reasons for increasing it. Employers need to offer the most competitive pay to attract and build effective talent pools.
  • Determine how many employees qualify for a minimum wage hike. You can conduct a workforce census to get a clear picture.
  • Create a model pay structure envisaging the raised minimum wage. You can spread the increment to at least $15 an hour over the next two or three years.
  • Envisage wage compression and devise a strategy to avoid it. You’ll need to create a formula that helps maintain reasonable pay differentiation across structures between experienced employees and new hires.
  • Communicate the impending wage changes and their implications for your employees. This will help eliminate friction and dissatisfaction among staff once salary increments take effect.

If you are looking for a consulting firm with experience working with salary, legal, and other human resources issues, contact the professionals at McKnight Associates, Inc today!