Is a Living Wage All the Rage?

More employers are pushing wages for their lowest-paid employees a bit higher

By Joanne Sammer May 6, 2015

Every few weeks it seems that another large national employer is announcing wage increases for its lower-paid employees. Some are framing the change as a commitment to providing a “living wage,” while others may simply be bowing to the realities of a stronger economy and more competition for talent. But whatever their reasons, the fact remains that these employers are pushing wages for the lowest-level employees a bit higher.

For other employers, this wage-increasing trend raises some important questions. What constitutes a living wage? If some employers are rising to this “living wage” standard or simply to a level higher than what they previously offered, do other employers need to respond in kind? Is it economically feasible for them to do so?

From Minimum Wage to Living Wage

Gravity Payments, a Seattle-based credit card processing firm, garnered headlines with its plans to raise the salary of all of its 120 employees to a minimum of $70,000 per year. Dan Price, the company founder, came up with that number after reading an article on happiness that tagged $70,000 per year as the amount of income necessary to maximize happiness. Other studies also find evidence that higher pay increases both employees' job satisfaction and productivity.

Retailer Ikea has tied its living-wage level to a calculator developed by the Massachusetts Institute of Technology to ensure that its wage levels remain connected to the cost of living in various locations.

“There is no agreed-upon standard for the living wage,” said Rick Guzzo, leader of the Workforce Sciences Institute at Mercer in Washington, D.C. It goes beyond covering just basic expenses and “focuses on the income required to feed yourself, have a roof over your head, get transportation to a job and to take care of your health.”

Mount Dora, Fla.-based First Green Bank’s living wage program provides a minimum $30,000 yearly salary or the hourly equivalent without a salary cap for both full- and part-time employees. The $30,000 figure is based on the U.S. Department of Labor’s calculations of minimum wages for central Florida. That figure is about $29,000, so the bank rounded it up to $30,000, said Ken LaRoe, the bank’s founder and CEO.

First Green Bank’s living wage program is driven by both philosophy and practicality. “We want to do the right thing,” said LaRoe. “If all businesses pursued this policy, there would be less need for a social safety net.” Like any employer, LaRoe also expects the living wage approach to provide short- and long-term benefits. So far, the program has increased employee satisfaction. “For the long term, we hope [to attract] a higher quality of co-worker.”

Whether this approach will resonate with more employers remains to be seen. LaRoe admitted that it could be difficult for some employers, such as those in the restaurant industry, to offer a similar program. However, “that doesn’t mean it shouldn’t be done,” he said, urging other employers to “push the envelope” in this regard.

Growing Pressure

Employers that have not raised wages are right to be concerned about whether these high-profile wage increases will put pressure on them to follow suit. However, that may be some time in coming. “For a lot of employers, the move to a living wage or the move to bring up the bottom of their pay scales is really not a market pricing issue,” said Guzzo. “These actions may look similar but they may be happening for different reasons.”

For example, given the attention being paid to income inequality, some employers may be making this move to contribute to their overall image and protect their brands as employers and as organizations. Others could be making the change to forestall government action on raising the minimum wage or simply because they are having trouble finding strong talent.

Consider these recent actions:

• Employees at Wal-Mart and Sam's Club stores have started making at least $9 an hour, $1.75 more than the federal minimum wage of $7.25 an hour. By February 2016, hourly employees will make at least $10 an hour after completing about six months of training. Wal-Mart CEO Doug McMillon said the decision was made as part of a strategy to retain employees and improve customer service.

• McDonald’s is enhancing pay and benefits for employees at its company-owned restaurants, including a wage increase projected to be in excess of $10 an hour, with paid time off for full- and part-time crew employees.

• T.J. Maxx, Marshalls and other department stores owned by TJX Companies are increasing pay for their lowest-paid workers to $9 an hour.

• Aetna is raising wages for its lowest-paid employees to at least $16 an hour. CEO Mark T. Bertolini said he expects the higher wages to be offset by reducing the $120 million spent each year on costs related to employee turnover.

Guzzo said he knows of more employers that are quickly working through the details of making similar moves to boost low-end wages but haven't announced their plans yet. “They might call it a living wage or they might not give it a label,” he said. “They might also have a schedule for implementing the change over a period of years as opposed to a sudden immediate change.”

For employers that are not yet ready to increase wages, they still have time to ensure that doing so is both necessary and the right thing to do for the long-term health of the organization.

Talent Competition

“Employers should have a clear understanding of the markets in which they are competing for employees,” said Ken Spencer, SPHR, president and CEO of HR Service Inc. in Salt Lake City. “If other employers in those markets are raising wages, that action is likely to have a major impact on others competing for the same talent.”

The first sign that a company needs to consider increasing its wages is if it is having difficulty attracting and retaining the quality of talent needed to be successful. Employers that are already experiencing this may need to move more quickly than others.

To get started, an employer must first consider the basics:

Does it have a good grasp of the labor market in which it competes?

Does the organization have a clear pay philosophy and strategy?

Are pay levels tied to recent market data?

This is the time to identify any weaknesses that could make wage-increase moves by competitors more of an issue for the organization. For example, an employer that has not kept pay levels current with recent market data or that does not have a strong pay strategy or rationale for pay levels may already be uncompetitive in the market without realizing it. In that case, any move by competitors to raise wages could have even more of an impact.

However, if organizations have strong compensation approaches and structures, they will be able to see more clearly—and more quickly—any impact other employers’ wage increases might produce. These organizations “may not have to immediately run out and respond to announcements of pay increases if they are already following a good strategy,” said Spencer. Instead, they may have more time to conduct an interim pay evaluation and adjust their strategy. Employers should ask themselves if higher wages would be aligned with their pay strategy and what the organization wants to do, said Spencer. Ultimately: “Are you going to lead, lag or pay at the market, and what does that mean in each case?”

Joanne Sammer is a New Jersey-based business and financial writer.​

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