Like a horse and chariot race, Ben Hur comes to mind when reading how many state legislatures have enacted new minimum wage laws, attempting to keep pace with minimum wage policies of the private sector. The Economic Policy Institute reports that 23 state governments across the U.S. have increased their minimum wages effective January 1, 2022 (some by as much as $15/hour), thus increasing the pay of an estimated 8.4 million workers. This boost of course comes with a significant cost impact, estimated to be a collective $5 million nationwide, and it doesn’t stop there for most employers.
There are other short- and long-term costs with raising the minimum wage, and they revolve around the concept of pay compaction (or compression). Higher minimum wages pressure a narrowing of the gap between the minimum and midpoints of salary ranges, making it so that when new hires are brought in, their starting wage is close to (or at the same rate as) their supervisors, sometimes even exceeding existing employees.
When you force the pay of so many team members into such a small area on the salary range, that creates pay compression.
Pay compression makes administering pay between supervisors and their reports (vertical compression) and new and existing team members (horizontal compression) rather challenging.
Targeting Pay Compression
Most state governments are merit-based and thus are limited to awarding flat increases across all employees and job titles; because everybody’s pay is increased by the same amount, compression remains. While most government entities have pay mechanisms that do allow for variable pay based on longevity, performance, recruitment, and retention mechanisms (referred to as differentials) alone don’t fix pay compression issues or avoid their cost.
By raising their minimum wages, Tribal governments (who are often competing for the same private and public sector employees as state governments) are experiencing pay compression as well. Recognized as the national leader serving Tribes and Tribal enterprises, REDW works with many Tribal clients through compensation projects to alleviate pay compression issues by recommending a trio of short- and long-term strategic solutions.
Innerworkings of a compensation study:
- At the implementation stage of a compensation study, REDW typically recommends that a Tribal council’s first priority be to raise the pay of team members who fall below the minimum of the new pay range so they are brought up to the new minimum.
- Next, REDW recommends team members who have a set number of years in their position be brought to the 90% compa-ratio (that is the point equidistant from the minimum and midpoint or as high as midpoint), depending on their qualification standards of the job and ability to meet them. This is usually a far higher cost than the bring-to-minimum approach, but is really the best practice for an employer seeking to be competitive in their marketplace as it helps them budget for the impact.
- Finally, for team members who have an excess of 20 years in their position, employers could target for as high as the 110% compa-ratio (or a point equidistant from midpoint and salary range maximum), not to exceed the maximum of the range.
To ensure that salaries don’t stagnate or fall behind the market after completion of a compensation study, we work with our clients to market-adjust salary ranges to stay competitive with geographic and regional employers.
The Cost of Not Staying Competitive?
Raising the minimum wage has always been forecasted to be an expensive proposition, but the cost of not staying competitive could spell the end of companies employing millions of Americans. Basing your employee compensation and benefit programs on reliable data is your key to hiring and retaining top talent. Purchase the 2022 Annual Survey Report or learn more about our 2023 Compensation Survey.
Have a question? Contact our Human Resources Consulting group. We’re here to make this easier.
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