Employers can make the best use of their time by dealing with the realities they can control.
On July 1, 2015, the City of Chicago’s minimum wage jumped from $8.25 to $10 an hour, and will increase incrementally to $13 by 2019. Meanwhile, efforts to raise the minimum wage are underway throughout the state. Should a similar hike be passed in Peoria, it will affect:
- Employers in areas now paying below the new minimums, who must raise their wages. They will have to raise prices or improve employee productivity to avoid lower profits.
- Employers in neighboring communities, who must raise wages to prevent their best workers from leaving for higher-wage areas. These are the ambitious employees with the drive that makes employers want to retain them, even at higher pay.
- Employers who now pay more than the new minimum. They, too, must raise wages in order to maintain wage differentials by paying highly skilled employees more than their minimum-wage counterparts.
Unless employers improve worker productivity, they will soon face declining profit margins. The alternatives are investing in labor-saving equipment or increasing their prices to consumers—and businesses are reluctant to do either. So how can they improve employee performance, and what is this better performance worth?
The Case for Productivity
All employers are faced with two types of expenses: overhead costs and operating costs. Prudent ones try to keep their overhead low and watch those expenditures closely.
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 percentage of total operating costs, employers can keep prices level and maintain profit margins despite the higher pay mandated by new minimum wage laws. Unfortunately, few small businesses, especially those in service or retail, take the time to look closely at the cost of labor as a percentage of their operating costs, or focus on ways to improve employee productivity to reduce this percentage.
For retailers, labor is often 25 to 35 percent of gross sales, and in manufacturing, labor averages about 65 percent of operating costs. Obviously, better employee productivity has an immediate impact on a business’ bottom line.
Again: faced with higher wages, businesses must raise prices, substitute costly new equipment for labor, or find ways to improve the productivity of current staffers. But raising prices irritates customers, while 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 the higher wages—costs only thought and ingenuity.
Thoughtful businesses are trying to find ways to motivate employees 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.
Quantifying Employee Performance
Three years ago, we published the findings of three nationwide surveys—conducted before, during and after the Great Recession—to discern how employers were trying to motivate their workers to improve their performance, and their perceptions as to which methods were most effective.
The results showed 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,” matched employees’ short-term horizons and had the greatest impact on worker performance.
Gainsharing is a group pay-for-performance program which quantifies and gives a dollar value to employee performance. When performance improves over a preset threshold, the value of the improvement is split between employer and employee. 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. Since gainshare earnings are paid on a short-term basis, they must be re-earned each gainshare period, negating notions that gainsharing is an entitlement.
Gainsharing dovetails nicely with employee expectations: workers expect “extra” rewards for the “extra" efforts expected of them. Fulfilling these expectations is critical for the long-term success of initiatives boosting employee performance. If the “extra” is absent, employee cooperation in any new venture will be short-lived. In many businesses, the most effective way to improve performance and productivity is by designing and implementing incentive programs like gainsharing—tying better performance to increased pay with short-term payoffs.
Many companies cite profit-sharing plans and year-end bonuses as motivational tools, but when asked, few staffers can say exactly what they did to earn them. Obviously, they enjoy receiving such bonuses. But the purpose of payouts isn’t to make employees feel good, but to reward better performance—thereby boosting profitability.
Much has been said debating the wisdom of raising the minimum wage. But employers can make better use of their time by dealing with realities they can control: by finding ways to motivate employees to improve their performance. iBi
Dr. Woodruff Imberman is president and CEO of Imberman & DeForest Inc., where Sophie Harms is a junior consultant. Visit imbdef.com for more information.