FAQs about Wage Caps
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By the CDS Consulting Co-op HR Team


Food co-ops want to be great employers, yet we face growing competition that puts increasing pressure on our margins and our need for productivity. In this new era of competition, many co-ops are exploring the idea of wage caps for the pay levels on their pay scales.

1. What are the pros and cons of wage caps?

Pros:

  • Knowing that there is a definite upper amount that each employee will earn in a specific position allows the co-op to accurately budget for labor expense regardless of each individual’s tenure at the co-op.
  • Having a front end, for example, full of 20-year veteran cashiers who each make $20+ per hour may make it impossible to bring in additional cashiers as the co-op grows because all the payroll dollars are going to fewer people.
  • Wage caps can provide more equity between different people performing the same position at the co-op. If one cashier is making $10 per hour while another is making $20 per hour for doing the same job, is a co-op really providing an equitable pay scale environment for its employees?
  • If a co-op has a culture of entitlement, wage scale caps can act as a brake on a runaway car. Pay caps per level can help management hold the line on what are reasonable wages for the level of responsibility for a position and keep the co-op from veering into dangerously high payroll expenses as a percent of sales.

Cons:

  • The idea of caps on each pay level may make it seem like the co-opdoesn’t honor longevity or tenure in its employees.
  • The demands of different positions may have increased over time andnew skill sets are required that may not have existed when the employee began in that position. For example, a buyer today may be required to have more developed computer literacy skills than needed 10 years ago, so the pay increases over time are warranted because the responsibilities have increased proportionally.

2. Should wage caps be handled differently at different ends of the pay scale?

Many co-ops have some kind of living wage philosophy which guarantees those at the lowest levels in a pay scale are adequately and fairly compensated relative to similar positions in their communities. But because payroll dollars are tight, food co-ops have a tendency toward pay compression in the middle and upper pay levels and these levels can suffer from much lower comparative wages than their conventional or similar counterparts. Removing wage caps in the upper levels of a pay scale allows the comparative pay for these positions to grow to a level more commensurate with their peers in the market.

Additionally, food co-ops typically hire lower-paid employees directly from their local labor market, whereas upper positions requiring more specialized skills may have to be recruited from further afield. This means the compensation on more specialized positions in the co-ops may need more headroom, unconstrained by wage scale caps.

3. Are there other ways to supplement compensation if wage caps are in place?

Many co-ops have profit sharing or gain-sharing programs, some as part of “open book management.” This can be one way to provide a substantial financial reward for employees contributing to overall financial objectives—up to the equivalent of one to two paychecks worth of “bonus.” These programs are the most effective way to augment compensation because they provide an income “bump” to the employees but keep it appropriate to the co-op’s performance overall.

4. What about Cost of Living Adjustments?

Often small across-the-board raises are viewed by employees as Cost of Living Adjustments (COLAs). Many co-ops do not use COLAs because they do not want to tie their pay to external forces but rather establish pay levels according to what is appropriate to the co-op’s size and internal equity. Furthermore, it can happen that local cost of living in a market decreases, such as was the case of the 2007-2009 recession, and this puts co-ops in an awkward position if employees are accustomed to automatic COLAs. So, if a co-op pays out an across-the-board increase to all employees, be clear on whether it is a COLA. And if it is a COLA, be sure it is paid to everyone equally and not only to those who are or aren’t topped out in their range.

5. What are strategies for effectively communicating with staff about wage scale caps?

No matter whether a co-op has wage caps for all or some or none of its pay levels, it is important to effectively communicate its philosophy about compensation. Employees need to know that the system for compensation was

developed through thoughtful consideration on what is fair and equitable, not only to each employee but also to the organization overall. Regular opportunities to discuss performance and build understanding are imperative.

Open Book Management can provide a great platform to build awareness of financial concepts and how a co-op’s margin minus labor performance can make or break prospects for growth. But if “OBM” isn’t in place, the co-op can still accomplish the same result by routinely discussing productivity and labor performance at store and department meetings so that all employees understand its significance.

If a co-op is using wage caps at lower levels, it must also communicate the expectation for employees in the capped levels to continually develop their skills and stretch to take on more responsibility as the primary means of earning more. Organizations that are genuinely interested in developing skills and moving employees up as positions come open will have more motivated employees. Compensation should reward merit and initiative, not complacency; a workplace culture that can help employees move up will not face as many employees who are “capped out.”

FAQs about Wage Caps
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