The Increasing Reservation Wage - and What to Do About It

Introduction

At this time of year, Compensation and HR professionals are busy reviewing and executing changes to their comp plans.?The focus is usually on what can be done to enhance employee recruitment, retention - and make a positive difference for the company.???That job is harder this time.??There are a variety of reasons: COVID, weak labor force participation, crisis pay, salary compression, remote work and other concerns.??A big issue is reservation wages.?

The Reservation Wage

More than ever before, the reservation wage is being discussed.??As a reminder, the reservation wage refers to the lowest compensation a person would accept to work in a position.??

For many positions, the reservation wage has increased dramatically in the last year.??The Federal Reserve Bank of New York does a great job tracking and publishing the reservation wage. ???(BTW:?The site allows you to sort data by age, education, gender and income.??It is a great resource, available at no cost.)??

In the past year, the average reservation wage for salaries below $60,000 and those without college degrees went up more than 20 percent.?This increase is significantly greater than is usual and expected.?And the average reservation wages of those earning greater than $60,000, and those with college degrees, increased about 3 percent and 6 percent respectively in the past year.

Of course, employers in some sectors, such as health care and transportation, have seen reservation wages increase much more. ?

When reservation wages go up, there is a knock-on effect for all compensation levels.?As the spend for wages rises, compensation professionals consider different ways to stay competitive in the market.??

?What Can Be Done About Rising Reservation Wages?

?This article briefly looks at five ways to deal with rising reservation wages.?

1. Total Rewards Communication

It is critically important for employers to clearly communicate the concept and value of total rewards.??What is the available mix of compensation and other rewards and benefits???Some employers will emphasize the strong value of non-compensation rewards and how they contribute to the full picture of total rewards.?Other companies may forgo benefits and non-compensation items to put those resources into direct compensation.?This may require a reset of wages and salary structures to respond to what works for that firm. ???

2. Bonus Plans and Variable Pay

It may be the right time to review variable pay plans.???By making a portion of available total compensation related to the achievement of specific goals, wages can be increased.?Of course, the higher compensation is tied to measurable individual, team and/or overall business results.??This can even include certain job categories where variable pay was not used before.??There is a good chance the company will spend more and budgets will increase.?Since it is based on success, leadership can see the results and may be more inclined to support these plans.

3. Skills and Development

Some employers are placing greater emphasis on up-skilling of employees.?All businesses have evolving needs for certain skills and abilities.??If current employees can become proficient in some or all of these areas, a business may be able to accomplish their goals without having to hire as many new workers to meet those requirements.?As a result, the spend can be allocated to current employees and the total expense is controlled.

4. Salary Adjustments Over Time

If market conditions require increased direct wages, some companies may be able to implement plans that adjust over time.?Instead of all at once.??Companies can develop a clear, easy to understand schedule of when compensation increases will take place.???Even if this does not match every other employer in town, it is an intellectually honest approach.??Employees always want to be treated properly and with dignity.??If an employer tries to “get away with” not paying fairly the business will always suffer in the long-term.??It is a flawed strategy.?Colleagues will check out.??They will be less innovative and motivated.??Customers will feel it, too.?The business will be less successful and lose to competitors.?

5. Scheduling and Location Flexibility

A clear lesson from COVID has been the value of flexible schedules and working from home.?These are considerations when discussing compensation, if the situation allows.??Employees really place a premium on time off, condensed work weeks and alternatives to the traditional 9 to 5, 40-hour work week. ?In some cases, employers can use flexible schedules and geographic locations to counter-balance rising wages.?This flexibility can deliver meaningful value to employees in a way that does not require a cash payout. ??

?Summary

Reservation wages are higher.??Employers are considering how they can succeed in their particular situation and in this climate.??As is always the case, the solution must work for the employer and employee in order to be truly successful.????

For compensation and HR professionals, these are challenging - and gratifying - times.??