In his 2014 State of the Union address, President Barack Obama urged Congress to raise the national minimum wage from $7.25 an hour to $10.10. Since then, 10 states have voted to increase their minimum wages, and many more states, counties, towns and individual businesses plan to raise, or discuss raising, their hourly employees’ pay rates in the coming years.
An August 2014 White House progress report on this initiative states that about 7 million workers will benefit from minimum wage increases passed since the president’s initial call to action in early 2013. But how will rising payroll costs affect small businesses that are already on tight budgets?
“One economic argument for increasing the minimum wage is that the increased purchasing power will lift the economy as a whole, including other small businesses,” said Dario Ambrosini, chief marketing officer of small business community Manta. “One economic argument against it is that small businesses will unfairly bear the brunt of the increased cost. Both arguments are correct. When you have over 25 million small businesses in the U.S., there will inevitably be some winners and some losers if legislation like this passes.”
“There are a number of ways that businesses might respond to the increase in minimum wage,” noted Daniel Andrew, CEO and founder of City Wine Tours and Trademark Tours. “One option is laying off staff members or reducing hours, [but this] may reduce product output or product quality and, therefore, may not be a very economically sound decision or efficient choice. Some businesses may instead choose to raise prices and pass the increased wage cost to the consumers. For businesses that are competing heavily on price, this might not be an appealing option.”
If your business is currently paying minimum wage to hourly employees, you’ll need to make some important decisions about how to handle the pending increase. Even if the federal measure doesn’t pass, your home state or municipality could vote to raise minimum wage in the near future. Experts shared their thoughts on what wage hikes will mean for smaller companies, and how these businesses can adapt.
Increasing efficiency will be the key to survival. Instead of cutting employee hours to meet increased wage requirements, a better option may be to find ways to increase productivity in your staff’s existing hours.
“Take a look at your practices,” said Cara Panebianco, senior employee relations consultant at professional employer organization TriNet. “Find places where efficiency and productivity can be improved. It’s about finding ways to get more out of your employees while they’re there.”
How your business raises productivity depends on your industry, Ambrosini said. In some cases technology or automation will be able to increase the output per worker. In other cases, employees may simply be asked to work harder. For example, in a retail setting, a business may increase employee sales quotas and other standards to help boost profits.
Panebianco also advised holding employees accountable for any lost product, noting that business owners should raise employee expectations along with their wages.
Businesses will need to look carefully at controllable expenses. If downsizing staff or increasing prices aren’t the right answers for your business, the most obvious solution is to cut costs elsewhere to offset the expense of rising salaries. This is especially true in the restaurant and hospitality industries, where hourly workers make up the majority of the workforce.
David Cantu, chief customer officer at restaurant shift management solution Red Book Connect, advised reporting and analyzing your product and labor costs to identify any excess spending. He also emphasized the importance of creating a “playbook” to help plan for and manage future expenses.
“In the restaurant industry, we create playbooks for a future business unit or products we’re managing,” Cantu said. “It helps to fully understand the plans for the future so we don’t deviate from the steps we need to take to be successful.”
Hiring will be more selective. Hourly workers, especially ones in part-time or seasonal positions, are often seen as relatively disposable, and in certain industries, turnover of these employees is very high. Once minimum wages go up, it will be more difficult for small businesses to justify new hires beyond their core staff, Andrew noted.
“Controlling costs can get out of hand quickly when payroll swells,” Andrew said. “We are very careful only to add employees that we absolutely need. We don’t hire to create growth; we hire as a response to growth.”
“With a higher minimum wage, staff automatically becomes less disposable, so offering positions to people with the right experience, work ethic and personality is paramount,” added Patrice Rice, founder and CEO of restaurant recruiting firm Patrice and Associates.
Once you have the right team in place, employers will need to provide ongoing training, team-building exercises and performance recognition, Rice said. When workers feel like they’re valuable members of the team, their overall job satisfaction increases, which leads to better working conditions for employees and customers alike, Rice added.
Retention will be even more important. Perhaps just as important as hiring the right people from the start is figuring out how to keep them. Reducing turnover can help you decrease the cost of recruiting, hiring and training new employees — and even help keep customers coming back.
“Thirty percent of [hourly retail, food service and hospitality] workers leave their jobs voluntarily every year,” Panebianco said. “If businesses can decrease turnover, it can be beneficial financially. Less turnover means better customer service and sales. A person who sticks around knows the product. You don’t have to retrain them.”
Cantu noted that businesses, particularly in food service, will have to change the way they train, hire and retain their staff, and it all starts with management.
“As the old saying goes, most people leave a manager, not a [company],” Cantu said. [8 Secrets to Keeping Employees Happy]
Before you make any major, permanent changes to your business operations, Rice recommended waiting a couple of months after the wage increases take effect, to see how it impacts your sales and profits.
“The exact result of minimum-wage hikes is hard to predict,” Rice said. “It’s vital for the long-term success of a business, and the short-term job satisfaction of a staff, that owners don’t rush to make drastic changes. If the overall spending power of a customer base increases with minimum-wage hikes, that could be enough to offset any increased wages a business has to pay. If profit margins slip because sales don’t change amid wage increases, then owners will know that it’s time to make changes to their operational model.”
Originally published on Business News Daily.