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Jan 27, 2015

Is it time to start delivering 'pre-emptive raises'?

A tighter labour market may prove to be a compensation game changer

By Claudine Kapel

When it comes to compensating employees, does your organization seek to lead the market?

Many organizations will probably tell you they don’t. They want to be in step with the market, but they don’t want to pay more than everyone else. And that continues to translate into fairly lean budgets for pay increases.

But a tighter labour market may push organizations to rethink their conventional wisdom on pay – and how it is leveraged to support the attraction and retention of talent. There are already signs that the growing competition for talent may be a game changer when it comes to defining how organizations seek to position themselves relative to market.

The recent announcement by Aetna that it will be increasing its minimum base hourly wage for its U.S. employees to US$16 per hour is a case in point.

Aetna reports the increase will “positively affect” approximately 5,700 U.S.-based employees. Aetna notes this translates into an average increase of 11 per cent, although for some employees the pay hike may be as much as 33 per cent, as some workers currently earn US$12 an hour.

According to Aetna, health care customer service, claims administration, plan sponsor eligibility, and billing represent the largest categories of employees who will benefit from the change. The increases are slated to take effect April 6.

Aetna has also announced plans to launch an enhanced medical benefits program for 2016 that will “help lower the out-of-pocket health care expenses for some of its U.S. employees.”

The company says these changes “align with Aetna’s mission to build a healthier world, and will increase the financial security for many Aetna employees by improving wages and health care benefits.”

The New York Times reports Aetna is counting on the pay increases “to make it easier to retain good employees and recruit for vacant positions.” The article, by Neil Irwin, observes that “turnover is expensive for a company like Aetna, as it must attract and retain thousands of workers who are less likely to feel attachment to a job if it offers rock-bottom pay and few benefits.”

Although the New York Times article references shifts in the U.S. labour market, it nevertheless underscores a more universal compensation truism. “If job growth continues at its recent pace over the next couple of years, companies that resist raising wages may find themselves at a competitive disadvantage, losing their best workers to companies like Aetna that try to get ahead of the curve a bit with pre-emptive raises.”

While Aetna’s change focuses on raising the rates of pay for employees at the lower end of the compensation spectrum, the principle reflected here is applicable to any type or level of talent. Whenever significant turnover – or the risk of significant turnover – translates into high costs or the potential for business disruptions, an organization may have to up its game to enhance its appeal as an employer.

And the cornerstone of a stronger game is often an organization’s compensation offering.

It will be interesting to observe Canadian compensation trends in the coming months and years. Will we continue to see lean budgets for salary and wage increases? Or will the emerging upward pressure on compensation borne by tighter labour market conditions translate into more aggressive pay practices?

It is worth noting, however, that two conditions need to be met in order to successfully deliver “pre-emptive raises.” As a starting point, you have to be among the first out of the gate to achieve a competitive advantage.

But in addition, those raises also need to be meaningful. If your organization is currently paying below market rates, delivering more generous pay increases may close some key gaps, but it won’t necessarily make you a market leader.

Regardless of your current compensation strategy, this may be a good time to revisit how your organization is positioned versus competitive market practice. And it’s probably also a good time to ask two questions:

  • Is there any strategic value in taking a more aggressive stance on base pay?
  • And if not, what’s your contingency plan if other employers in your market space do?
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