Understanding changes to the minimum wage

Increase the starting rate and you need to change how internal pay levels compare

By Claudine Kapel

Ontario’s decision to increase the province’s minimum wage in June has sparked the latest round of debate on whether the rate is too high or too low.

Ontario says it will increase the minimum wage from $10.25 to $11 per hour on June 1, 2014 – giving it the highest minimum wage in the country. The 75-cent increase reflects the annual change in Ontario’s Consumer Price Index (CPI) since the last increase on March 31, 2010.

The province says it will also introduce legislation that would tie future minimum wage increases to the CPI. Under the proposed legislation, annual increases would be announced by April 1 and come into effect on Oct. 1.

The proposed legislation reflects the recommendations of Ontario’s Minimum Wage Advisory Panel, which included business, labour, youth and anti-poverty representatives.

Ontario Premier Kathleen Wynne said increasing the minimum wage “will help improve the standard of living of hardworking people across the province, while ensuring that businesses have the predictability necessary to plan for the future.”

The Canadian Centre for Policy Alternatives (CCPA) described the change as “both welcome news and unfinished business,” suggesting Ontario now needs to bring the minimum wage above the poverty line.

Regardless of your position on the minimum wage, the changes will have compensation design implications for organizations that employ workers paid at the minimum wage.

The obvious design change is that the minimum of applicable hourly wage scales needs to be increased to align with the new rate.

But there are other design considerations as well. Because when you increase what is essentially the starting rate for a job, you also change how internal pay levels compare. The spread between what is earned by inexperienced new hires relative to more seasoned employees may narrow or be completely eliminated.

Using Ontario’s minimum wage change as an example, if an organization is paying new hires $10.25 per hour and more experienced employees $11.25 per hour, come June 1 this one dollar an hour spread will diminish to just 25 cents.

This raises an important compensation design question that’s pertinent any time there are external conditions that cause the going rate for particular types of talent to increase. What happens to employees already within the organization who are suddenly much closer in pay to less experienced new hires – or potentially earning even less than new hires?

If you’re dealing with an hourly wage scale, you may need to revisit some or all of the steps in the scale to maintain some sort of differentiation between start rate and the rate earned by more experienced employees.

If you’re dealing with salaried employees, you may need to review the design of your salary ranges to ensure they’re appropriately aligned with competitive market practice. You may also want to explore developing a budget for market adjustments to help bring the pay rates of existing employees more in line with competitive market practice. Otherwise you may run the risk of losing talent.

Ultimately, because the thigh bone is connected to the hip bone, an organization needs to look holistically at any factors that affect internal compensation levels and address not just the change itself, but also the ripple effect on other jobs.

Claudine Kapel

Claudine Kapel is principal of Kapel and Associates Inc., a human resources consulting firm specializing in compensation design, performance management, and employee communications. Claudine is also the co-author of The HR Manager’s Guide to Total Rewards and Straight Talk on Managing Human Resources.
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