Case Study: To raise wages or not to raise wages
Periodically we choose one of our case studies from real-member issues in our CEO peer group meetings. The objective is to share a real-world CEO challenge with practical solutions and experiences so that if you know anyone facing something similar, you can help them with ideas. We will never reveal anything confidential or of sensitive nature.
Industry: Manufacturing
Category(s) of the COPI: Challenge, Opportunity, Problem, or Idea:
What are the direct and indirect risks inherent in raising wages to the sustained profitability of the company?
THE ISSUE: The COVID 19 pandemic has contributed to a labor shortage that threatens the ability of the company to meet the demand for orders and by extension this third-generation family business’ survival. Without the ability to fill orders, sales will lag, more people will leave and the resulting spiral might be fatal.
The Insights:
Increase wages to attract and retain the best workers.
Provide profit sharing.
Reduce the risk of trying with a PPP loan. Risking an increase in wages w/o the PPP as a backstop would have to change the decision to try. Availability of the PPP loan protected the potential negative impact on cash flow had to raise wages not worked.
Be aware of potential friction from wage hikes between new and long-time employees.
Don’t rely on increased wages alone or you risk new hires being lured away for wages only. Consider the importance of culture in creating the environment that keeps them.
Ask employees what’s important to them.
Resist the urge to hire bodies that respond to higher wages and look for company fit.
The Outcome:
The owner decided to raise wages as a theoretical remedy to his labor shortage. Total costs of labor rose from 12% to 17% over the first 12 months but headcount also rose, then stabilized. There are no more shortages. The increased headcount has enabled the plant to fill more orders and sales have risen as a result of capacity increases. This allowed for better utilization of assets and has contributed to the early signs of improved profitability. Margins are at 6%, double what had been forecast.
There was early turnover from long-term employees upset at higher starting wages for new hires and the narrower gap between tenured and new employees but that has stopped.
