Twenty-six states have increased or will increase their minimum wage in 2023 as inflation continues to cut into the cost of living.
Wage increases are known to create a complex ripple effect in the workplace, particularly for employees in the immediate pay levels above entry-level workers. And companies that fail to properly accommodate minimum wage hikes in their salary planning could hurt employee morale and performance and indirectly lower executive pay.
When employers raise the base pay for entry-level workers, one would assume senior employees’ wages would also increase. But what tends to happen is that companies raise senior employees’ wages by a smaller margin, if at all. That can lead to wage compression: when the salaries of less experienced workers become closer to those of more tenured colleagues.
“We certainly are seeing that salary compression at entry levels…where the difference between the starting salary and that third or fourth level up used to be $5, and now it’s only $3,” says Jan Koors, senior managing director at the executive compensation consultancy Pearl Meyer. She notes the same can happen in the mid-manager and senior individual contributor ranges, especially in a tight labor market where companies hand out higher salary offers to lure talent.
Couple that with salary transparency laws that now affect one in four US workers, and such compressions could hurt productivity and morale. To be clear, the issue is not that minimum wage-earning employees are getting paid more but that more senior earners don’t see a corresponding pay bump. Employers must think critically about pay decisions and train managers to explain wage variances. “Frontline managers are going to have to become much more facile with their ability to explain why the compensation programs work the way they do,” Koors says.
Minimum wage increases are unlikely to directly lead to a compensation boost for C-suite members, though some links have been found before, depending on company size and industry. But broadly speaking, minimum wage increases can impact other factors that influence CEO pay, such as employee productivity and overall performance.
“The more reliable and tenured and educated my workforce is, the more productivity I have, the higher performance as a company I have,” Koors says. “As an executive, I get the benefit of increased financial performance, which influences my bonus, and increased stock price performance, which influences the value of my equity holdings.”