One of the main challenges that many companies in America are dealing with is how to handle compensation and benefits. This is not a new challenge. It has been a permanent feature of the American economy. The current struggles have their roots in the financial crisis that hit the American economy in 2009. The financial crisis hit the American economy about a decade after the dotcom bubble. The American economy is currently in recovery after these two major shocks.
However, many people have become impatient with the government for the slow rate of recovery. This is seeping into the national discussion with debates on how the government and employers should handle the tough economic times. Employers are struggling to retain top talent.
In addition, they are struggling to retain low-level workers who are usually hit hard by the negative impacts of economic problems. A movement to change the basis for wage calculations from the federal minimum wage to a living wage is gaining momentum. The reason for this is that the minimum wage in America no longer guarantees workers a decent life.
This paper examines the wage situation at McDonald’s and the attendant crisis. McDonald’s is one of the best-known American brands. The company happens to have a very poor reputation when it comes to employee wages.
In this context, this paper looks at the reasons behind the current push by McDonald’s and other large employers such as Wal-Mart to oppose the enactment of higher minimum wages in America, and the adoption of the living wage as the standard for measuring wages. The analysis will culminate in the development of recommendations for the management of the company on how to handle the current crisis.
Literature Review
The starting point for the analysis is the consideration of definitions of compensation and benefits. Compensation refers to the money paid for rendering a service or for supplying goods. Compensation may be given in monetary terms, through access to certain privileges, or by through complementary services. On the other hand, benefits refer to a special class of compensation given to employees over and above the obligatory payment for services rendered.
Employee benefits vary from employer to employer. In some cases, benefits may be regulated by law. Employers use benefits as a means of differentiating themselves in competitive labor markets. One example of the benefits offered to employees to retain them is giving them stock options.
The History of McDonald’s
McDonalds begun operations as a single store operated by the Richard McDonald Maurice McDonald. The brothers specialized in making hamburgers and based on their skills, they successfully opened a series of restaurants. The brothers focused on the delivery of fast food as swiftly as possible, as their source of competitive advantage. The restaurants soon differentiated themselves as fast food joints.
Ray Croc joined the company in 1955 as its franchising agent. His work was to sell the McDonald’s franchise to anyone interested in operating a McDonald’s café, provided he/she had the ability to meet all the franchise requirements. Later on Croc bought the business from the brothers and began an aggressive program of expanding the company. Currently the company serves an estimated 70 million clients annually, and has stores in 120 countries.
The company’s food production and service model were based on the production line techniques popularized by the motor industry. This included the use of a standardized model of production and developing the ability to deliver products of uniform quality in all McDonald’s stores.
The use of a mass production system meant that the company needed to employ many employees. The efficiency of the McDonald’s business systems also meant that the company needed only a relatively small number of skilled employees to manage the systems, and the low-level workers. The result was a large number of low skill workers, with the attendant low wages.
Current Compensation Challenges
McDonalds has been in the limelight for several decades in regards to its paltry remuneration packages for most of its low-level employees. The term “McJobs” which refers to low paying, repetitive, and unfulfilling work that required no creativity and with very little chances of advancement came up. The employment situation is improving in America. This means that workers who could not find better paying jobs elsewhere can now find better jobs as the economy grows.
This puts McDonald’s at a disadvantage because it relies on low-level workers to meet its business objectives. Apart from this environmental threat, the company is also dealing with pressure from lobbyists who are advocating for the adoption of the living wage as the standard for the minimum wage. The living wage is the money required to support a family of four to meet expenses for food, transport, housing, and other essentials.
In the current economic climate, the living wage is about $13.50 to $15.00 per hour in America. This shows that the legal minimum wage is only about half of the living wage. Projections show that if McDonald’s started paying a living wage, it would need $8 billion to meet its wage obligations.
This figure is equivalent the net profit the company posted in the last financial year. This shows that McDonald’s has very tough decisions to make in light of the impacts of either increasing or reducing the minimum wages. As long as McDonald’s is unable to match its lowest pay with the living wage, it will be difficult to shed off the reputation that led to the emergence of the term, “McJob”.
How Ford Handled Wage Problems
Henry Ford was one in a similar situation to what McDonald’s finds itself today. His company had a very high rate of employee turnover that in order to retain 14,000 workers, he had to hire 50,000 workers. The turnover was due to various reasons. First, the company required the employees to work for nine hours per day. This was unbearable for some workers at a $2.5 hourly pay. Secondly, these workers could do other jobs for better pay or for better conditions.
Therefore, Ford found himself dealing with low employee morale and a very high rate of employee turnover. The problem of the turnover is that each time an employee left, the company needed to hire a replacement and to train him. The cost of training new employees was higher than the cost of maintaining experienced ones. Ford decided to double the minimum wage from $2.5 per hour to $5 per hour.
He pegged the extra $2.5 to certain conditions to ensure he would get full commitment from his remaining employees. The result of the pay hike was that some of the employees were now able to buy the cars, leading to an increase in the sales of the company. The most significant effect was that it led to increased productivity.
Potential Strategies for Handling Wage Problems
McDonalds has some options for dealing with the current crisis. The first set of options is compensation based. In order to achieve greater employee motivation and lower turnover, the company must ensure that it has the best terms among its competitors. This means that the company should not struggle to meet the living wage standard if it is impossible to do it and remain profitable. Rather, it should ensure that its employees know that they have the best rates in the market.
There is greater flexibility when it comes to the benefits that the company can offer its employees as a means of dealing with the current crisis. The benefits should be aimed at increasing employee morale and increasing employee retention. One option is to develop in-service programs for its employees.
These programs should be given to employee groups who have the highest flight risk, and who need to further their skills. Other benefits worth considering include giving the employees opportunities to invest in the company, or investing with the help of the company.
Another approach that the company can use based on the human capital theory is to give its employees bonuses as a means of boosting their income, pegged on the performance of the company . This means that the company can institute bonuses tied to longevity of service in the company, as well as performance of an individual employee. This approach will ensure that the employees see the benefits of giving their best efforts to the company as well as staying with the company for a long time.
According to the Motivation-Hygiene Theory, remuneration has a limited effect on employee motivation. Beyond a certain remuneration limit, the company will not achieve commensurate motivational gains. The implication of this situation is that the company needs to find other ways of motivating its workers apart from more pay. Once the pay package is competitive within the industry and the competing industries, then the company should find other ways of motivating the employees.
Implications of Literature
The implications that arise from the literature reviewed are as follows. First, the competition for workers is not just within the fast food sub-sector. Low skill workers have a high rate of transferability as long as there are other lucrative openings. This means that the company is not just competing with its business rivals for workers. Its competitors in regards to talent acquisition include all industry segments that have jobs for unskilled or semi-skilled workers.
The company must analyze the competitive climate in employee recruitment in regards to the industries that need the same pool of workers as a basis for determining the pay levels that it should have. In other words, McDonald’s needs to know where its employees go after they leave, and the terms they find attractive. This will help in developing attractive in-house compensation packages.
The second implication that arises from the literature review is that a pay raise for low skilled workers is inevitable. Using the minimum wage as a guide for the lowest wages is unsustainable. The company must look at the options available for raising the pay of its workers. This should guide it in the efforts of developing a proactive plan to implement pay increases in the coming years.
The third implication arising from the literature is that the company needs to prepare itself for more pressure to raise wages. The pressure will come from lobbyists and from the government. Up to 70% of Americans support the call to increase the minimum wage to make it equal to the living wage.
This means that it is only a matter of time before politicians take not of public interest in the matter. With such certainty that the calls to raise the minimum wage are inevitable, the company needs to plan for how to remain ahead of the curve.
The fourth implication of the literature review is that the company has options concerning how to deal with high employee turnover and low morale. The company can increase compensation based on market conditions and based on its financial performance. Secondly, the company has the option increasing and diversifying the benefits that its employees enjoy to ensure that they do not leave.
This includes using in-service training to meet their need to increase their skills. The company can also open up investment opportunities for its employees in either the company, or its interests. The options listed here demonstrate that McDonald’s has many options on how to deal with this crisis.
The fifth implication of the literature review is that the company needs to deal with the reputation associated with the term McJob. This term is degrading to anyone who works for the company, and can be the basis for bad publicity. The McDonald’s brand should be associated with prosperity and a good life.
The term McJob makes it seem as though the company delivers its products at the expense of its employees. Customers can protest at this by avoiding McDonald’s stores because of this association. The company needs to do everything in its power to deal with the reputational risk associated with this term.
The literature reviewed did not reveal the company’s primary competitors for labor. This would have made it easier to develop recommendations in regards to how the company can handle the current crisis.
Recommendations to the Management
The recommendations to the McDonald’s company management are as follows.
- The company should take a proactive stance in regards to dealing with the issue of wages for its employees. Otherwise, the company will soon find itself under pressure from lobbyists and the government to increase employee wages.
- The management of the company should work towards the development of measures to motivate employees in both monetary and non-monetary terms.
- The company should not aim at meeting the living wage in the near term, but rather it should try to offer its employees better terms than its current competitors as it works towards meeting the living wage in the long term.
Conclusion
The issue of a minimum wage versus a living wage is an interesting dimension in the development of remuneration packages. This case illustrates that the dream of lifting everyone out of poverty and dire economic circumstances is still a work in progress. There is still need to work out a way in which all citizens can enjoy a prosperous life.
Businesses are also in a dilemma between maximizing profits and offering their employees the best remuneration packages. There are answers to this problem. The solutions call for a clear direction in regards to compensation and benefits, followed by decisive action.
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