Research Paper on "Compensation Management the Minimum Wage"

Research Paper 22 pages (7301 words) Sources: 30

[EXCERPT] . . . .

Compensation Management

The minimum wage should not be increased, for several reasons. These include the increased flexibility that a lower minimum wage gives to employers, the economic impacts of lower minimum wages, the reasoning that the minimum wage is ineffective at defending against poverty and the fact that states often set their own minimum wages. This paper will outline these different arguments in making the case against a rise in the minimum wage.

For businesses, a minimum wage is a constraint. With a lower minimum wage, businesses have greater flexibility in a number of areas. The first of these is the ability to adjust wages to local conditions. A human resources department can set wages in line with local costs. This may lead the firm to locate in low-cost areas, increasing competitiveness of the firm. With a national minimum wage, the ability and willingness of firms to move around the country to maintain competitive advantage is restricted, making firms vulnerable to foreign competition.

From a human resources perspective, wages are one element of the compensation package that can help to attract specific types of workers. Michael Porter tells us that the ability of a firm to succeed is dependent on the ability of a firm to adopt its chosen business strategy. A firm that intends to compete on the basis of cost leadership, for example, may have very simple labor needs and therefore seek to find the cheapest possible source of this labor. The minimum wage makes it more difficult to bring this investment to the United States, as the firm would face diminished competitiveness as the result of wages higher than the natural equilibrium level. If the firm is adopting a different strategy, it can pay higher than the minimum wage to attract better employees. The higher the minimum wage, the less flexible a firm faced with a global competitive environment can be with respect to using higher wages as a recruitment tool. It is worth remembering that so some extent, prices are dictated by the supply and demand dynamics of the market, not the firm's cost structure. The firm may have some pricing control, the impact of which will be discussed shortly, but for firms in industries where the market sets the price, a higher minimum wage directly reduces the ability to control costs and remain competitive.

The economic impacts of the minimum wage are negligible at best, negative at worst. Proponents of higher minimum wages argue that they raise the living standards among the poor. Yet companies faced with higher cost structures will seek to maintain their profit margins, which means increased prices. The inflation sparked by an increase to the minimum wage will mean that real wage gains are minimal. From the company's perspective, these cost increases also make the firm less competitive against foreign competition not subject to the same cost increases. If firms are less competitive, they will ultimately be forced to reduce the size of their workforces, so the minimum wage will cost the economy jobs (Saxton, 1996). Some would argue that the jobs lost were not good jobs anyway (Landsburg, 2004), but this argument disguises the fact that job losses are a symptom of a decline in the nation's economic performance.

Political decisions are not always made strictly on economic criteria, as governments seek to achieve social goals in addition to economic ones. The case made for a higher minimum wage is that it reduces poverty. Yet, higher minimum wages are ineffective at fighting poverty for a number of reasons. The first was mentioned above -- firms adjust prices for cost increases, causing inflation that negates the wage increase, such that the real wage remains flat even after a rise in the minimum wage. In addition, the purpose of the minimum wage is not to provide a long-term comfortable standard of living, but to provide a minimal standard of living for workers in transition. Workers on minimum wage are not intended to stay there, but to move forward into better positions over time. The key to alleviating poverty is to increase the number of good jobs available and to provide the education and training needed to put Americans in those jobs, not to artificially interfere with market wages at the low end.

Indeed, the minimum wage is a relatively punitive means of transferring wealth. It targets the owners of businesses that employ a higher percentage of minimum wage workers for direct wealth transfer to those workers. This wealth transfer does not hold over the long run as a result of the inflation in induces, and this wealth transfer is not spread over the broader section of the public. Other poor -- both working and not -- are not affected, neither are other business owners. While there is an ethical case to be made for the transfer of wealth to the poor, the minimum wage is an inefficient means by which to accomplish this task (Landsburg, 2004).

Combining the business argument for greater flexibility with the political concept of states' rights, it is also worth noting that individual states are free to set their own minimum wages. States are in competition with each other, as well as with foreign jurisdictions, for investment capital and jobs. Different states can have vastly different resource sets and different views on how they wish their societies to use. States' rights advocates have reason to be wary of a one-size-fits-all approach from the federal government -- what may be good for Oregon may not make any sense in Oklahoma. Just as the imposition of a minimum wage makes it difficult for firms to invest as they see fit, it also makes it difficult for states to compete.

The minimum wage is a contentious issue, because it often is viewed as a conflict between economic interests and human interests. Yet, the minimum wage is a poor means by which to enforce a social agenda. From a compensation manager's perspective, the minimum wage reduces the effectiveness of wages as a competitive tool, either in the ability to minimize costs or in the ability to offer higher wages to attract better people. There is no business case for a higher minimum wage, and there is little political case either, save for perhaps winning votes from the handful of career minimum-wage earners who will directly benefit from this inefficient form of wealth transfer.

2. Reducing expat costs can be done by attacking the largest sources of expat costs. These most significant costs are assignment allowances, which can be up to 35% of costs, property costs (35%) and relocation costs (15%) (Friedman, 2010). These costs are impacted by a number of different factors including the number of expats, the nations to whom the expats are sent, the package offered, using deductibles and changing the relocation agent. This paper will outline some of these strategies in terms of how they work to reduce total expat costs.

The first solution is the simplest and most obvious -- reduce the number of expats. On the surface, this seems difficult because the firm's business interests drive the number of expats it has and the number of placements it has. However, not all placements require expats and in many cases the number of expats in a placement can be reduced. Some nations will be more able to supply local talent than others, so this evaluation should be undertaken by the company to ensure that no superfluous expats are utilized.

Another strategy is to ensure that there is competition for expat slots. If a candidate knows or believes that he/she is the only viable candidate, he/she will have a stronger negotiating position and be able to improve his/her package. The human resources department should focus on building a strong pool of candidates in order to reduce this cost. With more candidates, the company is in a stronger position with respect to negotiating the expat package.

Expats with families come home early more often than expats that do not have families, primarily because of family influence. Therefore, a human resources department committed to reducing expat costs should consider focusing expat recruitment efforts on employees without families. Another factor affecting early returns is local language skills (Selmer, 1995). By identifying the factors that lead to early returns and taking steps to mitigating them, companies can reduce the costs associated with expat programs. This often means providing support to spouses and families. While it is typical that the employee receives significant work support, the family often does not. As a result, many assignments fail because of pressure from dissatisfied spouses or children. The company needs to be attentive to the needs of the total family, especially in more challenging nations, or simply select expats that do not have families (where it is possible to do so without compromising the assignment).

It is also worth examining the countries to which expats are sent. Many nations have stronger workforces that may be immediately obvious. Increased local hiring can reduce the need for expats, as… READ MORE

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