The Business Case for Increasing Pay for Low-Level, High-Turnover Jobs

Some firms are finding that offering higher wages to low-level, hourly employees is giving them a competitive advantage in today’s high-turnover environment.
Turnover and compensation

After years of cost-cutting initiatives, Wal-Mart Stores Inc. in 2016 increased worker hourly pay to an average of $13.69, according to The New York Times. The supermarket chain also invested in 200 training centers to encourage its hourly workers to learn new skills that would help them move up in the company.

Why did Walmart do this? In short, its business was suffering. According to the Times, dirty store bathrooms and empty shelves were just a few of the factors driving down customer service at the big-box retailer. Sales suffered as a result. Poor pay and little chance for advancement at the store-employee level created conditions ripe for high turnover. So Walmart did what companies seldom do. Instead of simply paying the minimum wage to control labor costs — and replacing workers when they inevitably quit — it boosted pay for its lowest-level workers and gave them a chance for advancement — and saw sales rise as a result.

“They certainly get it that pay matters,” said Sylvia Allegretto, labor economist and co-chair of the Center on Wage and Employment Dynamics at the University of California, Berkeley. The United States today experiences 4.3 percent unemployment and an abundance of available jobs, leading companies to compete for many of the same workers. “Workers that aren’t happy with their pay or benefits or their jobs will go look elsewhere when they have that opportunity,” Allegretto said.

And it’s the lowest-paying jobs that face the highest turnover. For example, average hourly earnings for people working in the leisure and hospitality sector stood at $15.32 in March; total separations, or turnover, stood at 6.2 percent, according to data from the Bureau of Labor Statistics. Total private hourly earnings during the same period stood at $26.13 with turnover at 3.6 percent.

Although business leaders may feel they’re saving on labor costs by paying this rung of workers less, higher turnover at that level requires them to train and onboard more incoming staff. This is compounded by the fact that many of those workers are the ones interacting with customers the most. “Workers are an investment, and if you don’t hold onto those workers, then you have to keep reinvesting. It’s costly,” Allegretto said.

Ultimately, workers leave jobs because they’re unsatisfied, Allegretto said, and the responsibility to fix that falls on the firm. Paid time off, child care and other benefits can be legislated, Allegretto said, “but in the absence of that, then it’s up to the businesses to either have those benefits or not.”

This trend has only exacerbated in recent years, with the time it takes to fill roles increasing. According to career provider DHI Group Inc.’s DHI Hiring Indicators, the mean vacancy duration in 2017 sits just under 30 days, compared to fewer than 20 days in 2010. “The view generally from management is that if somebody leaves, they’re easily replaceable,” said Bill Pelster, a principal at professional services firm Deloitte Consulting LLP. This is no longer the case, forcing management to rethink from an engagement and culture perspective how to retain workers, Pelster said.

Retention could improve if management treated engagement of their front-line workers as if part of the professional class, Pelster said. Historically, engagement surveys that companies administer haven’t reached low-wage workers, because management views them as easily replaceable. “The hourly workers — just like the professional workers — want to be heard,” said Pelster, before offering a line of caution for managers: “If you start asking the questions, and you’re getting responses, you actually have to be prepared to do something about it.”

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Better working conditions and higher wages vastly improved the retention rates in the trucking industry. According to American Trucking Associations, driver turnover currently stands at 71 percent annually, compared to 83 percent reported in September 2016. As cited in CNN Money, ATA’s Chief Economist Bob Costello said trucker compensation has risen as much as 8-12 percent in recent years. The median annual wage for a trucker that works for a private fleet, such as a truck driver employed by Walmart, is $73,000, according to ATA, as cited in CNN Money. Furthermore, regulations have decreased maximum weekly hours from 82 to 70.

Previously, high turnover and a shortage of workers could be attributed to a retiring workforce, low wages and undesirable working conditions, according to James Peoples Jr., professor of economics in the College of Letters and Science at the University of Wisconsin at Milwaukee. Previously, a large pool of available workers meant companies had to worry less about filling roles quickly. In recent years, however, the tightening labor market forced companies to rethink their compensation strategies. “In my opinion, it took some of the companies too long to figure out that we do need to increase the wages,” Peoples said.

Lauren Dixon is an associate editor at Talent Economy. To comment, email editor@talenteconomy.io.