You’re going to have to pay your employees more

Worker shortage is causing wage inflation

Whether in a TEC meeting, in strategic planning or at any gathering of business people today, the number one issue we’re discussing is the lack of available talent in the workforce.

It doesn’t matter if we’re talking about entry-level or lower skilled positions, sales or executive roles. There just aren’t enough people to go around. And here’s a news flash: It’s going to get a lot worse before it gets better.

Often, I hear millennials getting the blame with statements like “millennials don’t want to do the hard work” or “the millennials are only looking out for themselves.”

Of course, neither statement is true.

The talent shortage isn’t because the millennials are taking over, although demographics say they ARE taking over. The talent shortage has been a trend for more than a decade and was merely delayed after the 2008 recession because all of us baby boomers stayed in the workforce longer to try and rebuild our 401(k)s. Now that the stock market is at record high levels again, the rate of boomers leaving the workforce will actually accelerate from the 10,000 per day retiring right now.

So what? Here’s what:

You should expect and budget for twice your all-in labor cost in the next three to five years. The increases of up to 3 percent that have been commonplace absolutely will not cut it anymore.  Health insurance and other benefit costs will skyrocket during this same timeframe. Here are some examples I’ve seen in the past two years.

Company A hired an operations manager for one of its branches in 2014. His base was about $115,000, with a potential bonus of 20 percent of base salary. His boss left and the company promoted the operations manager to replace the boss.

His compensation jumped to a base of $175,000, with a bonus plan up to 40 percent of base and another 20 percent available through a phantom stock plan. Add in a 401(k) match, health care, etc. and our manager nearly tripled his total compensation in two years. To find his replacement, he had to start the new candidate at $145,000 with a richer bonus plan.

Company B has a self-funded health insurance program with a $100,000 stop loss policy.  Last year, the company saw a nearly $1 million increase in claims over 2014, and year-to-date 2016 has already paid out $500,000 more than in 2015.

While we don’t have all the data, early evidence suggests that many of the employees Company B has hired didn’t have health insurance in the past 24 months. As a result, they’re coming onto the company insurance plan and catching up on “deferred maintenance,” which costs the company more. For example, the rate of Type 2 Diabetes is increasing at an alarming rate.  Treatment for diabetes costs Company B about $2,500 per employee every month.

Company C is a mid-size bank in another state. Its entry-level teller positions are now up to $12.50 an hour, compared to the minimum wage of $7.25. Add the cost of insurance and benefits, and the total cost to the bank is more than $15 an hour. Personal bankers capable of taking a loan application are starting at $18 an hour.

The turnover rate for tellers is 130 percent per year! They’re leaving because they can earn more elsewhere.

Coping strategies

Stop denying that you’re losing employees. It’s almost laughable when I hear a business owner say, “I don’t know why our turnover rate is so high” when his or her employees’ wages, in real terms, have gone down in the past five years, his or her contribution to health care has gone up by 50 percent, and the business owner is stuck with a high-deductible plan.

Of course we need to have a great corporate culture and a higher purpose in the company. But we also have to pay people. Stop complaining about the $15 an hour minimum wage. It will be a moot point soon, because companies won’t have much choice except to raise the minimum if they want to keep employees.

Company C, the bank, is doing a trial of remote, live video teller kiosks. The tellers can be anywhere, including their home or Mumbai. They might still make $20 an hour, but they can handle many more clients and transactions every day. McDonald’s is doing this too.

Company B will need to raise prices. Trying to move employees to the exchange isn’t going to help recruiting and people aren’t getting any healthier. So far, wellness programs have shown very limited success. The good news is the millennials tend to be the most health and wellness-conscious demographic in the workforce.

Company A will continue to build its leadership team. Although it is paying more for executives and managers than ever before, it is also experiencing record sales and profits. By upgrading talent and operating more effectively, the company continues to grow significantly faster and more profitably than its industry.

The good news is there is always opportunity. The bad news is that we’re heading into the most challenging business environment in the past 10 years. n

-John Howman is a TEC chair. He is also chief executive officer of Milwaukee-based Allied Consulting Group LLC. As a serial entrepreneur, business and community leader since 1983, he has led a variety of businesses, from technology to consumer products. He leads two groups for TEC, a professional development group for CEOs, presidents and business owners. He can be reached at JHowman@AlliedCG.com.

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As a serial entrepreneur, business and community leader since 1983, John Howman has led a variety of businesses, from technology to consumer products companies. He leads two groups for Vistage, a professional development group of CEOs, presidents and business owners. He can be reached at JHowman@AlliedCG.com.

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