Should You Pay Minimum Wage, Or Living Wage?

Considering only 44% of Americans can afford $1,000 of emergency spending from savings, debates about what is a ‘living’ wage are heating up.

Undoubtedly, it is a concerning statistic that over half the nation would need to borrow money to address challenging situations. This can potentially push people into a downward spiral of credit card debt and high-interest loans.

Millions of people live from paycheck to paycheck under the constant stress of losing their livelihoods if something unforeseen happens. In such scenarios, being paid below a specific ‘living wage’ can threaten their productivity and their ability to contribute at work.

What is a minimum wage and a living wage?

By definition, a ‘minimum’ wage is the lowest amount an employer is allowed to pay an employee for work. Anything below that would be illegal.

Theminimum wage is intended to protect people from poverty.

What is the impact of increasing the minimum wage?

One of the most significant issues that increasing the minimum wage could be ‘pay compression.’ If a law mandates an increase applicable to the lowest level of employees, the pay ranges of higher levels could start overlapping or converging.

To offset costs, companies may be forced to be more conservative with pay increases and bonuses for higher-level employees. This would reduce their ability to compete in the market for those roles.

Like California’s proposed ‘Fast Act’, which mandates restaurant chains with over 100 outlets to pay $22 as minimum wage, the effect can be disruptive. Restaurant industry leaders claim they would have to increase prices for customers by at least 20% to accommodate the change.

In addition, they claim it could lead to unfair competition because of the exemption that smaller companies would enjoy. For example, a pizzeria with two outlets would not have the same wage guidelines applied to them.

How should companies adjust their pay strategy?

Instead of getting caught up in minimum wage vs living wage decisions, there are better ways to manage pay. You can be competitive by:

1. Evaluating the market and commissioning a benchmarking survey to compare pay and benefits. It will help you understand at what level competitors are paying.

2. Listening to your people and identifying potential financial well-being issues and needs. Stay tuned to changing employee demographics and needs.

3. Identifying the relative importance of each role through a job evaluation exercise.

4. Articulate your pay philosophy and define your pay strategy. Link your pay philosophy to your business goals and the direction of the company

5. Defining your market positioning for each role based on job scope and level, talent availability, and other factors like location. For example, you may have to pay higher than the market for some niche roles or to hire people in specific areas.

Conclusion

Pay does not need to be a race to the bottom to decide what is the absolute minimum you can get away with paying. It needs to attract, engage, and retain the right people who can contribute their best and build a future for the company and themselves.

About the Author

Sumit Single

Sumit has been working in HR & HR consulting roles for 16+ years across sectors and verticals and specializes in
organizational design, well-being, storytelling & design thinking, and performance management. In his career with consulting firms such as Aon, Deloitte, and Accenture, he has successfully led programs aimed at total HR transformation for clients.

As Associate Director for India Consulting at Deloitte, he recently worked with clients on cultural transformation, HR processes, and policy design. He also organized and spoke at conferences and events about various topics relevant to HR today.

Now self-employed, he works with clients across the globe on various HR solution areas.

Sam Reeve

Sam Reeve, CompTeam founder and managing consultant, is a pay and talent performance expert and a certified global compensation professional. His extensive experience with pay programs and competitive compensation analysis, career architecture, and talent management allows him to help clients of rapidly growing firms see accurate, measurable results, including increased productivity and significant pay savings, year-over-year.

As an innovative thinker with practical application, Sam strongly believes that everyone needs to be healthy and happy in their own lives to strive as a high-performing contributor. He is driven to help organizations match their employees with the work they are passionate about and reward their people for outstanding work.