Businesses can boost profits in face of minimum wage increases

By WOODRUFF IMBERMAN and SOPHIE HARMS
    Because of a recent ordinance passed by the Chicago City Council, Chicago’s minimum wage jumped from $8.25 an hour to $10 on July 1, 2015; and will increase incrementally to $13 by 2019. This makes higher productivity a must not only for employers within city limits, but those in next-door communities whose workers are ambitious enough to make extra efforts for extra pay.
    At the other end of Illinois, St. Louis Mayor Francis Slay is pushing to have the City Council vote before Aug. 28 to immediately raise that city’s minimum wage to $15 an hour. The August deadline is due to a new Missouri law that prevents Show Me State cities from raising local minimum wages after that date. Any St. Louis ordinance would be bound to affect Illinois businesses in neighboring communities like Granite City and East St. Louis. 
    Were the St. Louis City Council to pass this ordinance, it would impact businesses there and in adjacent communities in Illinois and Missouri, just as Chicago’s new regulation is giving businesses in the city and its surrounds a three-fold squeeze:
    – First, employers paying below the new minimum must raise their wages as the ordinance dictates. They will have to raise prices, improve employee productivity, or accept lower profits.
    – Second, employers in neighboring communities must raise their wages to prevent their best workers from job-hopping to the city for higher wages. These are the ambitious employees, with the drive that makes employers want to retain them even at higher pay.
    – Third, employers in Chicago and its peripheries, and potentially in St. Louis and its peripheries, who currently pay more than the new minimum will also be forced to raise wages because employers need to maintain wage differentials by paying higher-skilled employees more than their minimum-wage counterparts to incentivize ambitious workers. Those workers view themselves as worth more than minimum-wage workers, and demand higher pay to retain fairness and their self-respect.
    For many minimum-wagers, ease trumps ambition. How quickly the wage increases will spread and how frequently employees will seek those higher wages depends upon the convenience of switching jobs, according to the Regional Economic Development office of the Illinois Department of Commerce and Economic Opportunity.  This is the “PITA,” or “Pain in the [Butt],” Factor.
    The first element is distance. If a higher-paying job is close (about one to four miles) to an employee’s home or current job, they are likely (approximately 60-95 percent) to switch. However, if the job is five-plus miles away, they are only 10 percent likely to switch — the time and distance of a longer commute isn’t worth it.
    The second element is convenience. For example, many minimum-wagers commute via public transit.  If a job-switch involves, say, extra transfers, buses and trains, or a longer walk, they’re less likely to job-hop.  If their current job is steps from their residence, they likely won’t make the switch for higher pay — the current job is just too convenient.
    Similarly, wage increases in Chicago’s neighboring communities will be checked if those workers don’t want a more difficult commute for higher pay. However, this won’t prevent ambitious employees from seeking higher-paying jobs elsewhere. A long or inconvenient commute is less of a deterrent. Employers wanting to retain top-notch workers will have to increase wages.
    Employers will face declining profits unless they improve worker productivity to offset the new pay-rates. The alternatives are investing in labor-saving equipment or increasing prices. Businesses are averse to both. So how can they improve employee performance, and what is it worth?
    Employers are faced with two types of expenses: overhead costs and operating costs. Prudent employers try to keep overhead low and watch such expenditures closely.
    A large segment of operating costs is labor. If employees are more productive, fewer are needed. By reducing labor, employers can maintain prices and profit margins despite the new wage increases. Unfortunately, few small businesses take the time to look at cost of labor as a percentage of operating costs, or focus on ways of improving productivity.
    Thoughtful businesses are trying to find ways to motivate employees to increase their productivity, reduce redundant paperwork and headcount, or improve service and effectiveness so the same volume of work can be accomplished with fewer staffers.
    Three years ago, I published the findings of surveys conducted before, during, and after the Great Recession (“Trends in Engaging Employees to Boost Productivity,” Area Development) to discern how employers were effectively trying to motivate their workers to improve their performance. 
    The results showed that the recession had a severe impact on employees. Faced with financial insecurity, most wage-earners focused on paycheck size and job security as essential. Short-term economic motivators, such as “Gainsharing Plans,” had the greatest impact on performance.
    Gainsharing is a group pay-for-performance program which quantifies and gives a dollar value to employee performance. When it improves over a preset threshold, the value of the improvement is split between employer and employees. For every dollar paid out to workers in bonuses earned by specific measures of short-term performance, the employer saves a like amount in higher productivity; better quality; and improved safety.
    Many companies cite profit-sharing plans and year-end bonuses as motivational tools. However, when asked, few staffers can say exactly what they did to earn them. Obviously, they enjoy receiving such bonuses.  But the purpose of pay-outs isn’t making employees feel good, but rewarding better performance — thereby boosting profitability.
    Much has been said debating the wisdom of raising minimum wages. However, employers can make better use of their time by dealing with realities they can control — finding ways to motivate employees to improve their performance.
    Dr. Woodruff Imberman is president and CEO of Imberman and Deforest, Inc., a management consultant firm based in Evanston. He may be contacted at info@imbdef.com or (847)733-0071.