Don’t be fooled – address the low-wage emergency to fuel growth

The Situation: Everyone is focused on the double whammy of employee attrition, and wage inflation. But the headlines are missing the real low-wage emergency. This emergency has been brought to a head by recent spikes in inflation, but the data shows the crisis facing us has been decades in the making. Leaders must respond with programs that acknowledge employees’ urgent concerns and deliver a sustainable growth advantage, even as ‘the fooled’ cut back.

For whichever reasons you choose (from 23.7% average voluntary attrition across global service providers shown in Exhibit 1 to the digital skills gap), we have millions more jobs than people. Yet wages have been in decline in real terms for decades. The latest spike in inflation only highlights that reality. The current average wage increase in the US is 5.5%, despite inflation reaching 8.5% and rising.  Wage inflation? What wage inflation? Those with even a cursory understanding of the laws of supply and demand shake their heads in disbelief.

Exhibit 1: Global voluntary attrition rates are rising as employees look for greener grass

Source: HFS Research 2022, from HFS estimates and service providers’ quarterly financials 2021

Add a slew of tech redundancies to this confusion, many from companies that hit unicorn status as recently as a year ago (such as Carbon Health and Loom). Even super-profitable Tesla announced cuts that could impact 10,000 people. We face the gathering clouds of recession amid an increasingly angry workforce demanding wage rises and job security—the UK rail strike being just one ongoing example.

In many unionized environments, employees reject sticking-plaster quick fixes, such as Rolls-Royce’s offer of a $2,460 one-off “living-cost” bonus for lower-paid staff plus a 4% pay increase. And while Lloyds Bank’s offer of a $1,229 one-off payment to 64,000 staff has been okayed by unions in the UK, acceptance came with a warning that there “is still a long way to go to eradicate low pay in one of the economy’s most profitable sectors.”

US wage spending power has fallen 40%, while GDP has risen 250%

The recent inflation spike is not the only driver increasing demand for a rebalance toward fairer wages. The West has enjoyed strong and consistent growth, with small dips along the way, since 1972. London’s Financial Times (FT) published a graph in 2019 illustrating the relative growth of US GDP vs. wage growth. From 1972 to 2019, GDP increased from 100 to 350 points. Wage growth over the same period? None. In fact, the FT recorded a decline in real terms from 100 points in 1972 to nearer 60 in 2019.

The cumulative impact is so great that a 40% wage hike would only give the average American the spending power they enjoyed in 1972, and that in a country that has, in aggregate, become 2.5x richer in the intervening years.

Shareholder primacy means leaders are incentivized to maximize value extraction vs. cost in all their resources—people included. Paying significantly more for the very best talent has worked well for the likes of Google, but only because it can extract massive multiples of value vs. cost.

CEOs have been immune to this working-class and middle-class reality. The differential between CEO pay at leading firms in the US and average worker pay has risen from 20:1 in 1965 to 265:1 in 2018 (according to Statista). The US is the worst offender, with India (229:1) and the UK close behind (201:1). But immunity for your own pay packet does not protect your business against the impact of low pay on business performance. As MIT Sloan Business School professor Zeynep Tom puts it, it is unrealistic to expect employees to do a great job if their salaries are so low they are worried about buying groceries or paying their fuel bills.

Take the lead. Leveling up starts with you. This is an emergency!

You can develop a strategy to simultaneously deal with the short-term urgencies of inflation for your people and build toward a longer-term rebalance for sustainable growth.

Step one: Low-paid workers are feeling the pinch. When that hardship leads to daily money worries, employees are distracted from delivering their best performance and spend every spare moment looking for a better-paid job. Don’t forget, we are amid a global labor shortage. Replacing them won’t be cheap or easy. For example, in May 2022, the UK reported fewer job seekers than vacancies for the first time since records began. This is an emergency for them, and it will be for you if you don’t act.

Talk to staff representatives, and conduct a rapid-fire survey. Find out where needs are most urgent and respond swiftly with one-off emergency bonuses, help with travel costs, or whatever your people tell you will help them most—within the bounds of sustainable profitability, of course. Going out of business helps no one.

Step two: Develop a plan for the longer term. Measure your own CEO:average-employee pay ratio. Set targets to share the rewards of company growth more broadly. You don’t need to earn less for others to earn more. Apply this approach wisely, and you will attract the talent you need to deliver the kind of growth that means that even if your percentage share of the proceeds is marginally smaller, you will earn more.

Take a steer from the UN’s sustainable development goals. These goals focus on long-term sustainable growth. They state that by 2030, the income growth of the bottom 40% of a nation’s population should be higher than the “national” average. Substitute “company” for “nation,” and challenge yourself to start your journey with your lowest-paid employees today. This is an investment in the profitable sustainability of your enterprise—just as the UN sees its goal as a lever for planet-wide sustainable economic growth.

The Bottom Line: Accelerate the income growth of your lower-paid employees – and as others cut, you will grow

Acting to deliver faster income growth among the bottom 40% of your employees versus the income growth of all your employees will take determination when competitors are cutting their labor costs. But as part of a broader focus on employee experience, decent pay attracts better and more committed employees; you’ll snag the best of those your cut-happy rivals lose. Decent pay also improves retention and revenue-driving customer experience. Harvard Business Review found businesses that invest in their employee experience delivered an improvement of up to 45% profit per person-hour.

Where to turn for employee experience services? Try our 2022 Top 10.