Pay Compression Amid Minimum Wage Hikes

Addressing Pay Compression Amid Minimum Wage Hikes: An HR Guide

Many organizations across all sectors are facing a dilemma with the increase of the minimum wage. On the one hand, a pay hike for the lowest-paid workers is necessary to maintain labor market competitiveness as well as keep up with state and federal minimum wage mandates. On the other, compensation structures will be interrupted, potentially causing pay compression. Here are some thoughts on this trending topic as expressed by a panel of compensation experts at the WorldatWork 2021 Total Rewards Conference, which took place in October.

Increasing the minimum wage may have the following implications:

  • Necessitate reviewing pay ranges across entire compensation structures
  • The cost of incentives or benefits, such as 401(k) matching contributions, will increase as these are tied to basic pay
  • Employees in various sectors, such as hospitality, are already switching employers, attracted by higher wages
  • After raising minimum wage rates, employers have to confront pay compression issues impacting their more experienced employees at higher pay grades.
  • Providing for Wage Compression

    The panelists provided several practical suggestions to increase base pay while addressing wage compression for non-minimum wage positions. These include:

  • Proportionately increasing compensation for positions already above the minimum wage. This helps keep a reasonable degree of differentiation between employees at the lowest pay level and those above it.
  • Adjusting compensation structures in phases to address any budgetary constraints.
  • Creating flexible compensation structures and providing for pay differentiation for the various levels of positions below the $15 per hour rate. Salaries can be differentiated based on factors like performance or experience.
  • Not merging different position levels into a single pay grade to address compression. This approach can eliminate opportunities for career growth within a play structure. Instead, differentiate pay and retain multiple levels of job positions to let your employees progress within your organization.
  • Other Implications to Consider

    Incentives and employer contributions are typically a percentage of the base pay. Thus, raising the minimum wage will increase the cost of these payouts. Employers should start providing for the higher benefits budgets as these will impact their bottom line. Examples include:

  • Unemployment benefits
  • Social Security
  • Medicare
  • Retirement schemes like 401(k) plans
  • Increase in shared profit payouts
  • Workers should also acknowledge the possible impact of higher basic pay on their tax bills. They may no longer qualify for certain tax credits after-tax rate changes.

    You can strategize to minimize the cost of incentives after raising the minimum wage in your organization. One option is to move the variable benefits over to basic salaries.

    How to Prepare for Minimum Pay Rise

    Any pay-range changes will impact your compensation budget. It’s important that you anticipate and start planning for the adjustments right away. Here are some measures that can help streamline the inevitable transition:

  • Discuss with management the reasons and timing for the minimum wage increases in your organization to attract talent or keep up with state or federal mandates.
  • Conduct an audit to estimate the number of employees below the $15 per hour rate.
  • Create a new pay structure model for increasing the minimum wage. For example, you may aim for a phased pay-range adjustment to $15 per hour over three years or so.
  • Evaluate the effect of increasing the minimum wage for new employees against that of their long-tenure counterparts. Analyze how compensation rates compare within the same job positions and between employees and their superiors.
  • Communicate your pay hike plans and timelines with your employees from the outset.
  • State or federally mandated minimum wage increases are inevitable. Do you have a plan to address any potential pay compression issues and the cost implications? For additional insights on the subject, contact the experts at McKnight Associates, Inc today.