4 compensation strategies to respond to rising minimum wages

Cha-ching! That’s the sound of 27 states implementing minimum wage increases in 2024 or in the near term via annual indexed increases or tiered jumps. As employers strive to remain both compliant and competitive, experts say, they need to conduct a comprehensive evaluation of their compensation strategy and ensure it is rooted in a strong pay philosophy.

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According to a National Conference of State Legislatures (NCSL) report, the latest legislative changes mean there will soon be 30 states with minimum wages higher than the federal standard, which is $7.25 per hour for non-exempt workers. Seven states are following the federal mandate because they have no minimum rate or their rate is below the federal level. The minimum wage in the remaining states ranges from $8.75 per hour for West Virginia to as high as $17 per hour in Washington, D.C., according to a Paycom report.

The figures have been climbing in recent years, challenging some employers to keep up, says Craig Rowley, a senior client partner with executive recruiting firm Korn Ferry.

“Five years ago, employers were trying to match $15 per hour, and we’re now seeing some who are promoting a higher minimum wage of $20 to $25 per hour,” he says. “Every company in America that is paying close to minimum wage is asking, ‘How do we stay ahead of [minimum wage increases]?’ because this isn’t going to go away.”

Craig Rowley
Craig Rowley, Korn Ferry

HR challenges of minimum wage hikes

HR leaders need to pay attention to state-mandated minimum wage increases not only because of legal obligations but also because the trend can impact HR’s goals, says Shari Dunn, managing director of human resources and compensation at HR consulting firm Gallagher.

“Minimum wage legislation is, by definition, government intervention that affects labor market supply and demand dynamics,” she says.

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Employers’ pay rates are typically driven by goals that include offering competitive wages, achieving internal pay equity, operating cost-effectively, staying compliant, being transparent and motivating employees, she tells HRE.

Shari Dunn
Shari Dunn, Gallagher

“Compliance with minimum wage legislation clearly impacts employers’ ability to achieve the first four of these goals, in particular,” Dunn says. “There may be multiple ways in which compliance affects the employer’s ability to compete in the labor market, assure internal pay equity and, often, their payroll costs.”

Wage distinction falls, competition rises

Employers with starting wages higher than minimum wage can suddenly find they lose their competitive edge for recruiting and retention if the state imposes higher minimum wage rates that match or exceed the level they are offering, Rowley tells HRE.

Pay compression can impact pay equity

Increases in pay for the lowest-paid workers often result in undesirable pay compression, such as an inability to maintain a reasonable pay differential between supervisors and their reports or long-time employees and new hires, experts say.

“We’ve seen tremendous pay compression between brand-new employees and the most experienced employee who is in the same job category—even if they are a step or two higher,” Rowley tells HRE. “That’s a major issue for HR executives.”

Cost-effectiveness becomes difficult

Employers with tight payroll budgets may find it difficult to absorb the costs associated with increasing wages to match or exceed state minimum levels. This often results in HR leaders having to address one or more of the following consequences: layoffs, heavier workloads for remaining employees and increased benefits costs, Dunn says.

Multi-state employers face compliance complexity

Employers with offices in multiple states often encounter differing minimum wage standards in each location. Even though most payroll systems are automated and designed to comply with various laws in each location, the actual differences in pay may lead to an erosion in internal pay integrity and equity, notes Dunn. Because of this, even the best-constructed wage scales may not consistently result in pay equity when adjusted to accommodate government regulations.

HR leaders also need to ensure higher minimum wages are calculated in overtime pay and variable pay, she adds.

4 strategies to address minimum wage hikes

Dunn says strategic compensation management requires revisiting the employer’s pay philosophy and goals. With legal compliance as one of these goals, employers should first define and affirm the company-specific compensation strategy before the effective dates of any legal changes, she notes.

Once the evaluation process is completed, employers can consider these four compensation tactics, Dunn says.

Organizational design

Review and critique all organizational structures with an eye toward potential revisions of which employees report to various managers and executives, the creation of career paths and changes to hourly jobs themselves, she says. For example, consider how hourly jobs can be “enriched” to justify mandated higher wages. This might involve identifying ways to bring operational efficiencies to the organization, as well as tapping into any undeveloped or undiscovered knowledge, skills and abilities of employees.

Greater efficiency and better leveraging of the workforce’s skills, Dunn says, could offset some of the costs associated with paying higher minimum wages to remain in legal compliance.

Wage and salary structures and job classifications

Reevaluate all jobs at the first-line supervisor level and below from a labor market standpoint and also compare them to other roles within the organization, Dunn says. She notes this is especially important if any job or organizational reporting relationships have been altered. Based on the data, re-classify and re-price all of these jobs, not just those directly specified by the minimum wage regulations, she notes.

This step can avoid any undesirable wage compression and associated pay inequities, Dunn says. This will become the new framework for the employer’s pay decisions and help the organization remain consistent with its pay goals.

A total rewards optimization project can also help with wage compression, Rowley says. Long-time employees can be given the first shot at their preferred work schedule, additional vacation time or desired training as a means to compensate for the narrowing pay gap between their salaries and those of new hires, brought on by state wage increases, Rowley adds.

Cost modeling

Because most employers have payroll cost limitations, the actual costs associated with any pay changes should be compared under various scenarios to determine the best solutions, Dunn says. In addition, any benefits premium increases associated with increased base pay levels should be incorporated into these computations. For example, company-provided life insurance premiums are usually linked to base pay levels.

Change management

After all of these decisions have been made, employers should develop an implementation and communication plan designed to inform both managers and employees about any changes. This often will require consideration of the employer’s pay disclosure and transparency policies and practices, Dunn says.

As employers rethink their compensation strategies to keep up with rising minimum wages, this is also an opportune time for employers to look at the broader concept of providing a livable wage, Rowley says.

“Minimum wage says, ‘This is the minimum we should be paying our people,'” says Rowley. “But [employers should also consider], What do we need to pay people so they can actually live on their income?’ ”

Learn more about getting ahead of minimum wage increases at HRE‘s upcoming Elevate People, Ignite Change (EPIC) Conference, April 24-26 in Las Vegas. One session, Leading with Purpose at the Cherokee Nation, will explore how Cherokee Nation uses compensation to drive culture. The session features Corey Bunch, chief of staff for the Cherokee Nation; Paula Starr, chief information officer for the Cherokee Nation; and Samantha Hendricks, executive director, human resources for the Cherokee Nation.

Dawn Kawamoto, Human Resource Executive
Dawn Kawamoto
Dawn Kawamoto is HR Editor of Human Resource Executive. She is an award-winning journalist who has covered technology business news for such publications as CNET and has covered the HR and careers industry for such organizations as Dice and Built In prior to joining HRE. She can be reached at [email protected] and below on social media.