US companies are flush with cash, where does 'raise wages' fall on the priority list?

Last week on the blog we noted the shift in the mix of annual employee compensation increases - companies have and are continuing to increase their use of one-time and variable comp increases like annual bonuses and lessen their use of base (and in theory, recurring), salary and wage increases. The argument, many companies make, is that variable comp awards tie comp more closely to individual and organizational performance measures and provide the organization more flexibility and adaptability to respond to changing market conditions and business performance.

We have even seen this trend play out in the wake of two recent legislative decisions that have combined to create a pretty significant windfall of excess cash/after tax profit for many of the US's largest companies. One, the reduction in the 'stated' corporate income tax rate from 35% to 21%. And two, the reduction of the tax rate on the repatriation of US company cash that has been parked in overseas accounts, and now can be brought back to the US at a lower tax rate (about 15%).

With all this additional cash available to many large companies (most of whom are large employers), it makes sense from an HR / Talent point of view to ask a pretty simple question: Will and to what extent will all this cash flow to employees in the form of salary/wage increases or bonuses?'

Well, sadly for most employees, and for HR and Talent leaders who might be advocating for increased investment in people, the short answer to the question is 'Hardly'. Take a look at the chart below, from a Fortune piece citing some recent BofA Merrill Lynch research on just what these companies plan to do with their soon to be repatriated earnings:

Looking though that list of top six likely uses of this repatriated cash, maybe you could argue that the one that came in sixth, 'fund pension' has some direct benefit to current employees. Share repurchases, which we will see again in a second when looking at the knock-on effect of lower income tax rates, could also benefit employees who participate in ESOP plans or have a decent bit of their 401(k) tied up in company stock. But that is an indirect, and incomplete benefit at best.

Another review, this time by the financial firm Goldman Sachs, paints a similar picture of who the likely beneficiaries will be from lower corporate tax rates. From a piece reported by Marketwatch:

Buyback announcements are up 22% this year to $67 billion in just six weeks, Goldman Sachs said in a note to clients. This follows a report by benefits consulting firm Aon Hewitt finding that 83% of large companies don’t expect the tax cut to boost salaries at all — just help pay for small bonuses companies like WalMart  and AT&T, gave workers, which reporters soon discovered were, themselves, skewed toward higher-paid, longer-tenured employees in many cases.

And it comes as Goldman finds companies have raised guidance on re-investment in their businesses — the putative reason for cutting corporate taxes at all — only 3%.

A couple of things to note here. CEOs and Boards do have a responsibility to their shareholders - some would certainly argue that the shareholders' concerns matter more to corporations than any other stakeholders. So moves to increase the share price (repurchases), and return profits to the holders, (increased dividends), are definitely proper and prudent uses of excess cash/profits.

But the really small levels of internal re-investment, and commitment to improving the long-term compensation levels for employees is a little bit disconcerting. But it also reminds us of something really important. Namely, that for most large organizations labor cost, (and by extension, their investment in people), is just that - a cost that has to be managed.

What the organization is willing to invest, and whether they are willing to increase this investment is subject to a complex set of variables - competition for talent, product/service strategy, overall labor market conditions, the impact of automation and outsourcing, and even the legal/regulatory climate.

But what does not, yet, seem to be moving the needle on investment in people and employee compensation,(aside from the slew of copycat one-time $1,000 bonuses we heard all about), is this sudden windfall of excess corporate cash/profits as a result of recent corporate tax changes.

More simply put, organizations increase what they are willing to pay for any resource only when they have to, not because they are able to.

Apple won't volunteer to pay more per piece to their supplier of iPhone screens just because they can.

And they won't volunteer to pay their engineers, accountants, and facilities staff more just because they can as well. Interesting times for sure.

Have a great day!

The changing mix of employee compensation increases

TL:DR - More and higher one-time bonuses, fewer and less annual salary/wage increases

In the aftermath of the recent tax reform legislation passed by the US Congress and signed by the President, you certainly must have noticed a pretty long list of major organizations who reacted to the reduction in the US corporate tax rate by (among other things), awarding bonuses (oddly, almost all exactly in the amount of $1,000) to their employees.

Here is just a short list of select companies who have shared this windfall with their employees in the form of one-time bonuses:

Alaska Air, American Airlines, AT&T, Bank of America, Comcast, Disney, Home Depot, Lowe's, Southwest Air, Walmart, Waste Management - and there are lots more.

The companies above, (and plenty others) have directed the employee rewards portion of their expected tax cut windfall to these one-time bonuses, while a few others (Aflac, Boeing, Cigna, FedEx, Honeywell, UPS, Visa), have either supplemented these one-time bonuses with other employee rewards improvements - increases hourly wages, 401(k) contribution enhancements, and/or stock-based rewards.

But the vast majority of publicly announced employee rewards increases as a result of the corporate tax cut have been these seemingly ubiquitous one-time $1,000 bonuses. It is almost odd, (and if you are a conspiracy lover, curious), that so many companies in different industries all settled on this same bonus amount. Weird...

But these tax cut bonuses also draw our attention to a larger trend in employee compensation increases, one that pre-dates the recent surge in one-time tax cut bonuses - the trend of companies allocating more payroll budget towards one-time and variable awards, and relatively less budget to annual (and in theory, recurring), salary/wage increases. Said differently, more and more of the compensation increase that an average worker might see is tied up in discretionary and variable methods, like one-time bonuses. Check out this chart from a piece in the NY Times, reporting on an Aon Hewitt study of the topic:

Back in 1991, for example, variable pay (like one-time bonuses) took up about 3% of total compensation budgets, while the budget for annual salary increases was 5%.

Fast forward to 2017 and the amount of budget allocated to one-time bonuses has risen to 12.7% while the amount earmarked for annual salary increases has fallen to 2.9% (the 'getting 3%'ed to death phenomenon).

A closer look at the data shows that after taking an expected financial crisis/recession dive in 2008/2009, compensation budget allocations have not really recovered to their pre-recession levels, while the budget for one-time bonuses and awards has continued on a slow and steady climb. This makes sense for a few reasons. The harsh economic environment from the recession era is still on many CEO's minds, and the need to be more flexible and adaptable, (especially when it comes to employee compensation), has become standard operating procedure and many companies. E

Given these recent tax cut bonuses play into that line of thinking - CEOs can't be sure these tax cuts will be permanent, a change in control or philosophy of Congress could alter the landscape at almost any time. Giving one-time bonuses instead of 'permanent' salary/wage increases allows companies to respond to market, competitive, and economic conditions in almost real-time, whereas granting (and potentially removing), salary/wage increases is a much more difficult challenge to manage. Have you ever known any worker who will accept a salary or wage cut cheerfully?

But beyond that, companies still need to keep worker's desires in mind, after all the labor market remains extremely tight. The Times reports that a second Aon Hewitt survey showed that when asked what they wanted their companies to do with their tax cut windfall 65% of them said they wanted a pay raise, far more than other options like a bonus or an increase to the 401(K) contribution. Interesting stuff for sure.

Compensation is a tough job for sure. And oddly, it doesn't get that much easier when there are more dollars to spread around.

Have a great day! 

What should an employer do when the state reduces the minimum wage?

While confessing to not knowing any of the back story or local details behind this, I read with interest this piece in the Atlantic about the state of Missouri rollback of the city of St. Louis minimum wage from $10/hour back down to $7.70/hour. The Atlantic piece is solid, if a little long, so if you don't have time to dig in to it the essentials are as follows:

1. The city passed an ordinance which was designed to gradually increase the minimum wage in St. Louis from $7.70 to $11. The wage had hit $10 just three months ago, in May.

2. The state of Missouri, whose governor and state legislature were not in favor of this increase, passed a so-called 'preemption' law, effectively barring cities and other local jurisdictions from setting local minimum wages at a level greater than the state level minimum wage.

3. The preemption law went into effect on this past Monday, reducing or re-aligning the minimum wage in St. Louis back down to the state level of $7.70.

Got all that?

Why this was interesting to me was not because of the politics of it, the local control vs. state level authority issues, or even the economic benefits and/or constraints that minimum wages place on labor markets.

What is interesting is the dynamics at individual employers who just three months ago were forced/compelled to raise wages to $10/hour for anyone earning less than that, and who know are allowed, by virtue of the preemption law going into effect, to cut wages back, as far back as $7.70.

These numbers might seem small, but a cut from $10 to $7.70 is almost a 25% reduction in pay. I don't care what you are earning, if the boss cuts you by a quarter, you are going to feel some pain.

So back to the interesting, (to me) stuff. Employers in St. Louis have three (maybe more, but they would be variations of these), options with respect to the wages of any folks they had to give increases to back in May,

1. Cut everyone who was bumped up to $10 back to their wage level as of May. 

2. Keep everyone at $10 who was given the bump in May.

3. Pick and choose who gets to stay at $10, (the better performers, more essential folks), and bump others back to their May hourly rate, or some other rate less than $10 that better reflects their performance, value, and position relative to their peers.

Options 1 and 2 are the easiest to implement, and for different reasons, the easiest to justify back to the employees. Which is why I would expect that the vast majority of employers will opt for one of these approaches,

Option 3 is harder to effect, requires better understanding of employee performance and value, needs managers that know what is going on and can communicate clearly why decisions are being made the way they are, and could possibly drive better overall performance, as better workers feel more rewarded, and the others see a way to work towards the wages they desire.

Yep, Option 3 is definitely much harder to pull off. Which for some cynical reason seems to me the one that the fewest employers will pursue.

Have a great day!

The Geometry of the Deal

So do you want to know what I did this past Saturday night? 

Scratch that, I assure you that you do not, as you would likely become distracted having to navigate the simultaneous emotions of boredom, pity, and incredulity.

So let's pretend for both of our sakes that I didn't spend a good portion of Saturday night re-watching (thank you Amazon Prime), the 1996 HBO movie The Late Shift, a 'based on real events' telling of the late-night TV wars of the 1990s following the retirement of TV legend Johnny Carson, long time host of NBC's The Tonight Show.

(Ok, just between us, this is what I did on Saturday night, don't judge, and roll with me on this)

Quick recap of the movie's key elements: 

1. Johnny announces his plans to retire from TV in May of 1992, giving NBC effectively a full years notice and time to select his successor

2. NBC has to decide who will be the next host of The Tonight Show, an extremely important decisions because (at least in 1992), The Tonight Show was still very popular, and extremely profitable. This was a big deal for NBC, (and their corporate owner at the time, GE).

3. There are only two candidates. One, Jay Leno, who was well-liked, funny, (he was), and had become Johnny's regular guest host in the last few years of Johnny's run. And two, David Letterman, who had been hosting the Late Night Show on NBC, (the 12:30AM show that ran right after Johnny) for the past 10 years, and who was also popular, if slightly more edgy and hip than Leno.

4. The rest of the movie, (I won't spoil it for you, as if I need to worry about dropping a spoiler for a 20 year-old movie), runs through what happens in the run-up to NBC's eventual decision, and the chaos and corporate drama which almost immediately ensues.

I decided to watch this movie again for one specific reason, and that was not because I could not remember who did get The Tonight Show.

No, it was because I recently was in a discussion with a friend regarding a real-life contract negotiation, and during that discussion I wanted to advise my friend to essentially 'think bigger', to not necessarily get bogged down in trying to 'win' on the small items, but rather to try and garner support for something more expansive, something more wide and far-reaching, frankly for a pretty significant re-interpretation and definition of the business relationship altogether.

And then the phrase I was wrestling with trying to articulate finally popped into my head - I wanted him to change 'the geometry of the deal'.

And then, I remembered where I first, (and I am pretty sure the only) time I heard that phrase - the movie The Late Shift.

About a third of the way through the movie, Letterman comes to realize that NBC intends on awarding The Tonight Show host job to Leno, and is frustrated and confused and doesn't really know how to move forward. His ally (and Carson's producer), Peter Lassaly advises Dave to meet with a Hollywood agent, something Dave has in the past had no interest in doing. Lassally does convince Dave to meet with one of the most powerful agents in Hollywood, Mike Ovitz, and the 'geometry' line comes from Ovitz, when he sits down to meet with Letterman and Lassally.

(Note: I can't find a clip of just the Ovitz meeting, below is a YouTube embed of the full movie, fast forward to 35:12 for the meeting, which is only a little over 2 minutes long). Email and RSS subscribers, click through.

Here's the text of the Ovitz speech as well, in case you can't be bothered to mess around with the clip:

Michael Ovitz: Peter, I know Dave's circumstances, and so I know why you're here. Dave is a star of such compelling stature that frankly it makes me personally angry he finds himself this abused. We pride ourselves here at CAA in developing a career plan for our clients that protects them as much as it enriches them. David has set such an incredibly high professional standard and yet he is going disturbingly unrewarded. That just doesn't make any sense; it's simply bad business practice. Obviously, we have an interest in establishing a business relationship with you Dave, and you Peter. Frankly, we have worked out a career plan for David, and it includes securing everything for Dave that he wants. EVERYTHING. Of course that means an 11:30 television show. Dave will be offered an 11:30 show, and he will be offered it by every network. The geometry of the deal will be far larger, the studios will be in, the syndicators, the full range of the entertainment industry. We shall frame a deal that will make you one of the giants. And if you give us the privilege of working with you, CAA will take care of everything your talents deserve, and his spirit desires.

Awesome, right?

And if you did watch the clip in the movie when Ovitz makes the speech you will catch his confidence, his preparedness, ("Peter, I know Dave's circumstances"), and his all-around dominance of the proceedings. Dave leaves the meeting much more confident himself, which is how all the best coaches, agents, teachers, leaders, or bosses make the people they work with feel.

But most of all, and why this is so cool is that phrase - 'The Geometry of the Deal'. It's been in my head for 20 years, and now, hopefully, it's in your head too.

Go kick some a$$ this week.

I will try to as well.

Taking care of customers by taking care of employees, Part 2

A few months ago I shared on the blog some details about fast-food giant McDonald's recent improvements in both same store sales, customer satisfaction, and customer service, (think shorter wait times in the drive thru), that were largely attributed by McDonald's CEO to a series of comprehensive hourly wage increases for thousands of front-line staff.

For a quick refresher on that story, here is part of what I wrote back in March:

What if there was another, simpler way to improve customer service that didn't involve 'engagement' at all, but did impact those employees that are on the front-line working with and helping customers every day? You'd be interested in something like that, wouldn't you? What if it was as simple as cutting a check? Well, make that several thousand checks.

Check this excerpt from a recent Fortune piece - McDonald's Says its Wage Hikes Are Improving Service:

The hamburger chain in April announced it would raise the average hourly rate for workers at the U.S. restaurants it owns to $9.90 from $9.01 starting July 2015, with average wages climbing above $10 per hour by the end of 2016. The company also said it would allow those employees to earn up to five days of paid vacation every year following one year of employment.

McDonald’s CEO Steve Easterbrook, who took the helm in 2015, has since moved swiftly, closing hundreds of weak stores, bringing back all-day breakfast, and simplifying the chain’s menu, reducing bottlenecks in serving customers quickly.But improving the customer experience hinges on workers being on board with all these changes, hence the raises.

“It has done what we expected it to—90 day turnover rates are down, our survey scores are up—we have more staff in restaurants,” McDonald’s U.S. president Mike Andres told analysts at a UBS conference on Wednesday. “So far we’re pleased with it—it was a significant investment obviously but it’s working well.”

In October, McDonald’s reported its first quarter of comparable sales gains in two years. The company built on that growth with a huge 5.7% increase in the following quarter.

Wow, is it that simple? A general 10% across the board wage increase and sales and customer service both rise enough to offset the costs of the increased wages? That's it? Man, what took them so long to sort that out?

That was McDonald's story back in March, and if you read the entirety of the piece, you will see that I acknowledge that there were probably some other, and possibly significant factors at play that likely also contributed to the uptick in sales and improvement in customer metrics. But there can be little doubt that the wage increase had an effect as well, and I would argue, the most pronounced effect. 

Let's fast forward to earlier this week where Business Insider shared some details of another massive retailer taking a page from the McDonald's (as well as the Costco) playbook of increasing wages and improving training, and perhaps most importantly, concentrating on employee scheduling, (and not just to 'optimize' staffing levels) - none other than Walmart. What have been some of the effects of wage increases and overall heightened investments in people at America's largest retailer?

From the Business Insider piece: 

Walmart is becoming a better place to shop because it started paying employees more.

For many years, the company was plagued by widespread complaints about poor customer service at its stores.

That was until last year when Walmart, under pressure from investors following several quarters of same-store sales declines, decided to invest billions of dollars in wage increases and training for workers.

Specifically, Walmart committed to investing $2.7 billion over two years in higher wages, scheduling improvements, and employee training, following in the footsteps of companies like Costco.

Walmart's efforts so far have translated into a pay raise of about 16% to $13.69 per hour for non-managerial full-time employees, The New York Times reports.

In the meantime, widespread issues in Walmart stores such as empty shelves and cleanliness have significantly improved.Three out of four Walmart stores now meet the company's own customer service standards, according to the Times. A couple years ago, just 16% of its stores met those goals.

It turns out that paying people more may have made them better employees.

The piece goes on to mention, (like in the McDonald's situation), some possible other reasons for the improved results, and some alternative motivations for Walmart to make these investments in their workforce, but as in the McDonald's case, Walmart's leaders see a clear line between taking better care of employees and taking better care of customers, (and driving better top and bottom line results).

I think after these two cases, you get the idea of where I am going with this. I will end this piece with the same couple of thoughts I used to end the March piece on McDonald's:

Sometimes, maybe most of the time, we tend to over think what it takes to keep people (reasonably) happy, and give them a situation where they feel good about the work they are doing, and the customers that they are serving. 

You might not be able (nor necessarily should you), give everyone on the staff a 10% bump. But there probably is some other, simple, reachable change you can make that would serve the same purpose. It's out there. You can find it.

Just don't call it "employee engagement" and you will be fine.  

Have a great day, and if you hit up a McDonald's or a Walmart today, let me know how it goes.