Big Companies Are Raising Wages for Lower Earners

High-visibility moves are response to tightening job market, labor and political pressures

By Stephen Miller, CEBS Jul 15, 2016
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Jamie Dimon, chairman and chief executive of JPMorgan Chase, recently announced—via a high-profile New York Times op-ed—Why We're Giving Our Employees a Raise, to take effect in October. He wrote:

Our minimum salary for American employees today is $10.15 an hour… . Over the next three years, we will raise the minimum pay for 18,000 employees to between $12 and $16.50 an hour for full-time, part-time and new employees, depending on geographic and market factors. …​

A pay increase is the right thing to do. Wages for many Americans have gone nowhere for too long. Many employees who will receive this increase work as bank tellers and customer service representatives.

JPMorgan's news follows similar, highly publicized wage-raise actions by Starbucks and, earlier this year, by Wal-Mart, among other national employers.

On the political front, in response to an ongoing campaign by union activists, the Democratic party this month for the first time put ​in its platform a call for a $15 federal minimum wage. Many states and localities, some with minimum wage rates already significantly above the current federal minimum of $7.25 per hour, are moving to raise them higher still. Most significantly, California and New York have adopted a $15 minimum wage rate, to be phased in over the next few years.

Minimum Wage Campaign

Several developments are driving increased attention on low-end wages, said Craig Rowley, a Dallas-based senior client partner with pay consultancy Korn Ferry Hay Group, in the firm's retail, hospitality and consumer products practice.

"The economy has been improving and unemployment is down to 4.7 to 4.9 percent," he noted. "The ability for organizations to recruit is getting tougher and has been for probably the last 18 months—not as difficult as it was before the big recession, but until about two years ago the market could hire talent for hourly level positions fairly easily. Now it's tightening."

Another element Rowley pointed to is "the whole debate around raising the minimum wage, which has been ongoing for about three years now," as represented by organized labor's Fight for $15 campaign. "The pressure to raise the minimum wage has captured the attention of executives and has become a board-level conversation," he noted. "You have organizations currently paying a minimum wage of $9 an hour saying, 'The heck with it, let's just go to $10 an hour because we think that's what the minimum wage will be in the next couple of years and we want to get ahead of the game.' "

Still, "to go to a $10-an-hour minimum wage or a $15 minimum wage would be a huge cost to the economy and to the companies."

He shared the results of a Korn Ferry Hay Group analysis of 140 large retail companies in the firm's database, with annual revenues ranging from $500 million to several billion dollars. Of over 4 million incumbent salaries at these companies, 2½ million positions made less than $10 an hour. "The cost to move those people to $10 an hour would be between $4 billion and $5 billion, and that doesn't include any compression adjustments rippling upward. And the cost for that same group to go to $15 an hour would be over $20 billion, just for the firms in our database."

Facing that cost hurdle, "companies are trying to figure out how to stay competitive with their labor costs. On the other hand, nobody wants to be the company that's the last to raise their rates and risk losing their good talent."

Pressures on Smaller Employers

While the country's biggest companies will figure it out, and always have, Rowley said, "it's the small employer that's going to struggle with this," he noted. Big companies, as they raise their minimum wage rates, are at the same time investing in technologies to replace many low-end jobs with machines. But "the small employer often doesn't have the capital, or the flexibility, to do that. So small employers are going to have to be very nimble, and they're going to have to think about how they differentiate themselves [among job candidates] when everybody else may be ahead of them in compensation."

As they raise their wage rates, big firms ​are replacing ​low-end jobs with machines.

Rowley also ​referenced a 2014 Congressional Budget Office report showing that increasing the minimum wage to $9 an hour would result in a loss of 100,000 jobs in America, while a hike to $10.10 an hour would eliminate 500,000 jobs. “So, if you take that to $15 an hour, it suggests the loss of millions of jobs,” he commented. (CBO hasn’t yet released a projection at $15 an hour.)

Salary Compression

As to whether increasing low-end salaries will cause companies to raise compensation up the job ladder to avoid compression, which is already being exacerbated by the Department of Labor's revised overtime rule, Rowley was succinct: "It won't. Or at least not a lot."

From what he's seen at organizations that have raised their minimum wage rates, "those who are currently making $10 an hour go up 2 percent or 3 percent, but those making $11 an hour, as long as they're in their salary range, don't get a raise."

It's not that companies wouldn't like to make compression adjustments to maintain distance between job levels, "they just can't afford it," Rowley said.

In California and New York, for instance, employers are "paying about $10 an hour minimum wage right now, up from $9 in the past. Over the next 5 or 6 years, they're looking at a dollar increase in the minimum wage every year. So the compression gets complicated."

While this can cause "a fair amount of frustration for employees who aren't getting a raise," companies will "try to manage the situation the best they can, and it will work out over time. But the economy is only growing annually at 2 percent, and without a full-growth economy—even though unemployment is getting better—it's hard to raise prices right now" to produce the increased revenue that could fund higher wages across the board.

As to the apparent contradiction of tepid economic growth and a tightening labor market, "keep in mind that part of the drop in the unemployment levels is people dropping out of the labor force," Rowley pointed out. "The participation rate has been at a record low."

Variable Pay Could Take a Hit

Over the past decade, a greater portion of compensation has shifted from base pay to variable pay, such as performance-based bonuses, Rowley noted. "If all you have is a 2 percent merit pay increase budget, how do you engage your people? Many companies have been looking at providing hourly employees with incentive plans or other sorts of profit sharing to engage them in the success of the business."

But, he added, as companies factor in likely minimum wage increases that will drive their costs up, "the question they're asking is, 'Can I afford that anymore? If I just gave you a dollar an hour increase because of a minimum wage hike, can I afford the incentive plan?' "

That's another pay-related challenge employers will be figuring out over the coming years.

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