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How To Improve Profits While Paying the New Higher Minimum Wages

In order to keep labor costs in check while adjusting to higher wage rates, employers should concentrate on motivating employees to improve productivity.

Q3 2015
The new municipal rules raising minimum wages will make higher productivity a must not only for low-paying employers in areas covered by these rules, but also for businesses in next-door communities where minimum-wage workers are ambitious enough to make an extra effort for extra pay.

Those most affected will be:
  • Employers within a government’s jurisdiction now paying below the newly, mandated minimums. They will be forced to raise their wages to higher levels either immediately or in steps over time, as the new regulations dictate. These businesses will be the first to have to raise prices, improve employee productivity, or accept lower profit margins.
  • Employers in neighboring cities and communities next to those areas directly affected. They will be forced to raise their wages to prevent their best workers from job-hoping to companies paying the higher mandated rates. These workers are the ones who tend to be the most ambitious, with the drive that makes current employers want to retain them even at a higher pay level. For them, ambition trumps ease.
  • Employers within and on the peripheries of areas covered by the new rules who now pay a bit more than the new, mandated minimums. They will be forced to raise their wages for two reasons: first, because employers need to maintain wage differentials by paying higher-skilled employees more than their minimum-wage counterparts to create incentives for workers wanting to get ahead; and second, because their workers view themselves as “better” than minimum-wage workers, and will demand to be paid more to retain their “self-respect.” Again, boosting employee productivity is the safest way to maintain profit margins.
Ease and Distance
Ease trumps ambition. How quickly the wage increases will spread and how frequently employees will seek the higher-paying jobs depends upon the ease and convenience with which an employee can switch to a higher-paying job, according to Antonio Baxton, spokesman for the Regional Economic Development office of the Illinois Department of Commerce and Economic Opportunity.
Thoughtful businesses are trying to find ways to motivate employees effectively to improve their productivity on the plant floor, reduce redundant paperwork and headcount in back offices, and improve the service and effectiveness of sales representatives so the same volume of work can be accomplished with fewer staffers.
The first element is distance. If a higher-paying, similar job is less than a mile away from an employee’s home or current job, there is about a 95 percent chance the worker will make the effort to switch to a higher-paying, similar job. If the job is about three miles from home, there is a 60 percent chance he will job hop. But if the higher-paying job is more than five miles away, the minimum-wage worker is extremely unlikely (only about a 10 percent chance) to move. The effort of the extra commute isn’t worth it.

The second element is convenience. The fewer headaches commuting involves, the more likely an employee will switch jobs. Even if the higher-paying job is five or miles away, if commuting just means a longer bus or rapid transit ride before getting off about a block or so from the new job, the worker is far more likely to consider a transition than if the new commute involves several busses or trains, walking more than several blocks at either end of the ride, or both. Conversely, even if the new job is only one to three miles away but involves multiple bus transfers and then hiking four or five blocks, chances are a worker won’t job-hop, even if the new job pays more.

Finally, if a minimum-wage worker’s current job is within a block or two of his residence, he most likely will not make a job move whatever the pay differential — the current job is just too convenient.

Similarly, the spread of higher wage rates in communities just outside the jurisdiction of the new minimums will be retarded if workers in those areas don’t want the bother of longer or more difficult commutes to higher-paying jobs. However, this will not prevent ambitious, go-getter employees in these areas from seek higher-paying jobs in locations where the new minimums are required. Employers wanting to retain top-notch workers will be forced to increase their pay rates. In other words, a lack of convenience or a greater commuting distance is less of an irritant to ambitious workers than to their more indolent counterparts.

Labor Costs’ Effect on the Bottom Line
Employers — be they small retailers, distributors, manufacturers, repair shops, or franchised fast-food restaurants — will face declining profit margins unless they improve current worker productivity so they can afford the new, mandated pay-rates. The alternatives are investing in labor-saving equipment or increasing their prices to consumers. Businesses are reluctant to do either. So how can they improve employee performance, and what is the better performance worth?

Any employer is faced with two types of expenses: overhead costs and operating costs. Overhead costs include rent, real estate taxes, licensing payments to a franchiser, initial capital investments in equipment or for raw space buildouts (either of which must be amortized), computer software and hardware systems, websites and marketing, and professional services like accounting. Whether business is robust or slow, these costs remain fixed. Prudent employers try to keep their overhead low and watch such expenditures like hawks.

Operating costs include labor, the cost of raw and semi-finished goods (inventory), lighting and heating, and other utilities. The greater the volume of business, the more inventory needed to prevent shortages and the more hours employees must work to fulfill customer demands.

Obviously, one of the largest segments of operating costs is labor. But if employees are more productive, fewer of them are needed. By reducing labor as a percent of total operating costs, an employer can keep prices level and maintain profit margins despite the higher pay rates mandated by the new minimum wage laws. Unfortunately, few small businesses, especially those in service or retailing, take the time to look closely at their cost of labor as a percentage of their operating costs, nor do they focus on ways to improve employee productivity as a way to reduce this percentage.

Retailer labor costs vary depending upon whether a business makes and sells products or simply markets them. For retailers, labor is often about 25 to 35 percent of gross sales, and inventory is often about another 20 to 30 percent. This contrasts with manufacturing, where labor averages about 65 percent of operating costs. Obviously, better employee productivity has an immediate impact on a business’ bottom line.

Most small business owners now struggle to survive as the waves of local, state, and federal government regulations flood their desks and municipalities, hungry for new revenues, inflict new taxes on their business community. On top of all this, these business owners are now faced with higher wage levels, especially those that have traditionally paid at or near the minimums.

Again, to maintain their already thin margins, they must either raise prices, substitute costly new equipment for labor, or find ways to improve the productivity of current staffers. Each has its cost — raising prices irritates customers; paying for new equipment is expensive, and few banks are interested in financing such purchases for smaller businesses; but the third way — finding ways to motivate current employees to improve their productivity and performance in order to absorb their new, higher pay rates — costs only thought and ingenuity.

The third choice is most promising: thoughtful businesses are trying to find ways to motivate employees effectively to improve their productivity on the plant floor, reduce redundant paperwork and headcount in back offices, and improve the service and effectiveness of sales representatives so the same volume of work can be accomplished with fewer staffers.

Effective Motivators
Three years ago, I published the findings of three nationwide surveys conducted before, during, and after the Great Recession. Their purpose was to discern how employers were trying to motivate their workers to improve their performance, and their perceptions as to which methods were effective — and which were not.

The results clearly showed that the Great Recession made a severe impact on employees at all levels. Faced with job loss, reduced pay levels, and the general insecurity that plagued American families, most wage-earners focused on job security and paycheck size as being most important to them. Short-term economic motivators like “gainsharing-sharing” plans seemed to match employees’ short-term horizons and had the greatest impact on worker performance.

Gainsharing is a group pay-for-performance program under which employee performance is quantified and given a dollar value. When it improves over a threshold pre-set by management, the value of the improvement is split with the workers. So for every dollar paid out to workers in gainsharing bonuses earned by specific measures of short-term performance, the business owner saves a like amount in higher productivity (less overtime, fewer staffers); better quality (less internal scrap and rework, fewer customer complaints); and improved safety. Since employee gain-share earnings are paid on a short-term basis (often monthly), they have to be earned and re-earned each short gain-share period. This negates any notions that gainsharing is an entitlement.

Gainsharing dovetails nicely with employee expectations: Workers expect to receive “extra” rewards for any “extra" efforts expected of them. Fulfilling these expectations is critical for the long-term success of any new initiative for boosting employee performance. If the “extra” is absent, employee cooperation in any new venture will be short-lived. In most businesses the most effective way to motivate employees to improve their performance is to design and implement incentive programs like gainsharing plans, tying better performance to increased pay with short-term payoffs.

Many companies say they are trying profit-sharing plans and discretionary year-end bonuses to motivate their staffers. However, when asked, few of the staffers being rewarded by such schemes can say just what they did to improve profitability, nor why they are receiving the amount they are being given. There is no question that they like to receive such bonuses — who doesn’t? But the purpose of these reward schemes is not to make employees feel good, but rather to reward innovation, better performance, and hence boost company profitability.

Wasted Ink, Rhetoric
Much has been written in newspapers and magazines and much time spent on Sunday morning talk shows debating the wisdom of raising minimum wage rates. However, small business owners can make better use of their time by dealing with those realities they can control — finding ways to motivate employees to improve their performance.
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