How To Cope With New Minimum-Wage Laws
The other day, California governor Jerry Brown signed a law raising the state’s minimum wage to $15 over several years. A few hours later New York governor Andrew Cuomo announced agreement on a similar measure, which would raise the minimum (in stages) to $15 in New York City and $12.50 upstate. Seattle already has a $15 minimum, implemented just last year. Other cities and states may follow.
California Gov. Jerry Brown signs a bill creating highest statewide minimum wage at $15 an hour by 2022. (AP Photo/Nick Ut)
Many small-business owners are concerned—not to say apoplectic—and no wonder. Suddenly labor costs are increasing, and by government mandate. If you’re currently paying $10 an hour for your front-line employees, you’re looking at a 50% increase over the next few years.
What to do? Some companies—call centers, for instance—may be able to outsource part of their work to lower-cost states or countries. Others can invest in equipment that reduces the need for labor, like those computerized ordering machines you often find on restaurant tables these days.
Most companies will also re-examine their pricing tactics, figuring out where and when to increase what they charge their customers. All their local competitors are facing the same cost increase, so it’s likely that prices will be creeping upward anyway.
But there are at least two longer-term strategies that merit a look. They won’t necessarily apply everywhere. But at least one may be helpful to your company.
The first: reanalyze
the components of your labor costs. Labor costs include not just wages and
benefits but also the cost of hiring, training, firing when necessary, and day-to-day
supervision. There are usually significant tradeoffs among these different
elements, and companies in some industries can choose very different labor-cost
You can see the possibilities most clearly in retail. Many retailers, from Walmart on down, pay as little as they can. Their strategy is to keep wage rates low regardless of the consequences. As a result, they often must put up with unmotivated employees and high turnover. They have to pay for a lot of supervisors to make sure the employees do their jobs.
Other retailers—Costco, Trader Joe’s, and the convenience-store company QuikTrip among them—take a different approach. They deliberately pay their employees well above market. They provide good benefits, plus avenues for career advancement. The strategy enables them to attract and keep more capable employees, and to tap into more of those employees’ discretionary energy. Retention rates are far higher, so the companies spend less money on hiring and training. Supervision costs are lower.
The “good jobs
strategy” doesn’t come free, as MIT’s Zeynep Ton shows in a recently published book by that title.
High wage rates are what designers and engineers call a forcing function. They
force retailers to manage their operations tightly. They force them to
cross-train employees so that people don’t stand idle in slack times. They
force them to know their customers well enough that they can reduce selection
and still give shoppers what they’re looking for.
But developing those
capabilities pays off in spades. Ton studied several good-jobs retailers in
depth and found that they typically outperform competitors, just because they
can do things that competitors can’t.
The second strategy: get your employees on board. Begin educating them on what those higher costs mean for the business. Engage them in figuring out how to boost sales, increase efficiency, and grow profits—and then share the improved profits with your employees.
That’s essentially what a couple of Chick-fil-A operators in West Virginia did a few years ago. Their workers were mostly high-school students and other part-timers. No matter—the operators created a simplified income statement for each of their stores, showing sales, cost of goods (including direct labor), and gross profit. It didn’t take long for the employees to understand what those numbers meant—and what made them move.
It also didn’t take long for them to start coming up with ideas: special promotions, talking up the restaurant with their friends and neighbors, learning to work more efficiently when they were on the job. Employees of a Boston restaurant that pursued this open-book approach found ways to cut cost of goods from about 30% to the mid-20s, helping to boost operating profit by more than 10 percentage points.
Neither of these strategies is a quick fix; both require serious commitments. For instance, if you open the books but don’t follow through on people’s ideas, you’ll find that interest wanes pretty quickly. But the two strategies have one big advantage: you’ll get your employees on your side. And you will be less vulnerable, not only to today’s increases in the minimum wage but to tomorrow’s as well.
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