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Tackling the ripple effects of minimum wage hikes

It’s important to consider pay design implications for all employees
Canadian Money
Responding to a minimum wage change can have a hefty price tag for organizations. i viewfinder/Shutterstock

By Claudine Kapel

With Ontario, Alberta, and British Columbia all planning major hikes to the minimum wage, the question is more when than whether such changes will be implemented.

From a compensation design perspective, these changes can be significant. That’s because compensation represents an eco-system of interconnected roles — so changes to pay levels within one role or level can have more widespread implications.

Consider the Ontario’s government’s plan to increase the minimum wage from the planned $11.60 on Oct. 1 to $14 on Jan. 1 and then $15 on New Year’s Day 2019.

With each change, organizations should revisit pay levels, not just for employees whose rate of pay slips below the new minimum wage level, but for other roles as well. In particular, what you need to be mindful of are instances of pay compression — which arise when changes to the pay of one or more employees closes or eliminates a desired spread in pay levels.

Typically, organizations want to have a spread in pay levels between:

  • new, less experienced hires and longer-service, more experienced employees in the same job
  • entry-level roles and jobs at the next level up
  • supervisors and their direct reports, including the rates of pay for supervisors and the highest rates of pay for unionized roles.

Pay compression can be problematic for a variety of reasons:

  • It fuels concerns about pay fairness because differences in pay levels may not be sufficient to appropriately recognize and reward differences in job accountabilities, performance, experience and/or time on job.
  • It may inhibit employees from wanting to apply for or be promoted into higher-level roles because the increase in pay may not be sufficient to warrant taking on increased responsibilities.
  • Employee morale may suffer because longer-service employees may resent having new hires reach certain pay levels much more quickly than they did.

A change in the minimum wage can therefore have a significant impact on an organization — not just because certain roles or individuals will need to be paid more, but because the change may also cause pay compression issues.

For example, let’s say you have a group of employees in an entry level role — some of whom are paid at the current minimum wage, and some who are paid above that level because they have longer service and have reached a higher step in their hourly wage grid.

When a minimum wage increase take effect, it changes the spread in pay between those getting a lift in pay because of the legislated change and those who don’t. Those experiencing a pay increase as a result of being brought to the new minimum wage will now be paid closer to:

  • individuals with longer service in the same role
  • roles at the next level up
  • their immediate supervisor.

To counter the pay compression, organizations will often provide increases to other affected roles to try and maintain their desired pay spreads. These adjustments may not necessarily equal the increases arising from the change in minimum wage as a percentage of base pay. You would need to do some modelling to determine the most appropriate adjustments, balancing affordability with the need to address pay compression.

This is why responding to a change to the minimum wage can sometimes have a hefty price tag. It’s not just the lift to those who are now below the new minimum wage that has a cost. The additional course corrections implemented to reduce or mitigate the pay compression also has a cost.

Some key questions to ask when assessing the impact of a minimum wage hike include:

  • What jobs will see an increase to the minimum pay level as a result of the increase to the minimum wage?
  • How many individuals will need an immediate pay increase to bring them to the new minimum wage? What is the associated cost of this change?
  • Within the jobs affected by the minimum wage increase, what is the current distribution of pay for individuals in the same job?
  • What level of increase would be needed to provide adjustments to the individuals already paid above the minimum wage to maintain a reasonable spread versus those getting an increase due to the change to the minimum wage? What is the associated cost of this change?

It’s important when addressing legislative changes with compensation implications to consider all the interconnected pieces when formulating a response. Simply doing the minimum — for example, just bringing all affected employees to the new minimum wage — can lead to unintended consequences down the road.

By understanding that compensation management is akin to a three-dimensional puzzle, you can make more informed decisions when faced with external changes impacting pay.

Claudine Kapel is Principal of Kapel and Associates Inc., a compensation and human resources consulting firm based in Toronto. She can be reached at claudine@kapelandassociates.com or at kapelandassociates.com.

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