Amazon starting pay increase good for workers, comes with ‘big challenges’

Amazon recently announced an increase in the average starting wage for their workers to $18 per hour. The following Cornell University experts weigh in on what this change will mean for workers, managers and the broader industry.

Diane Burton, human resources professor and director of the Institute for Compensation Studies in the ILR School, is an expert on monetary and non-monetary rewards from work, and how rewards influence outcomes for individuals, companies, industries and economies. She says while raising wages is great for employees it can cause challenges for managers including how to pay for the wage increase and how to handle morale issues from wage compression.

Burton says:

“Raising the wage floor is good for workers but comes with big challenges for managers. First, how do they pay for the wage increase – by passing on costs to customers? By reallocating resources away from shareholders? Or by redistributing income from the top of the hierarchy to the bottom? Second, how do they handle the potential engagement and morale issues that might arise from wage compression. When firms raise the floor for frontline workers, do they also need to raise the wages throughout the hierarchy?

“When we design compensation systems, we consider both wage compression—the distance between the top and the bottom of the organizational hierarchy—­and wage dispersion—the pay differences between workers who essentially do the same job. Both matter to employees because they shape perceptions of fairness.

“When prominent employers raise wages, others necessarily take notice. We know from studies of pattern bargaining for union contracts and of starting salaries at elite law firms that there are ripple effects throughout the industry. Employers who are unable to compete on wages can be creative with other kinds of rewards such as increased flexibility, better training or advancement opportunities, or a more compelling mission or purpose.”  

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Tae Youn Park, human resources associate professor in the ILR School, studies how employment policies and practices, such as compensation, parental leave, and employee turnover and retention, affect both employers and employees. He says although higher wages are better, many workers are looking for more in a compensation package including flexible schedules, childcare or education tuition support, and paid leave opportunities.

Park says: 

“Regardless of what Amazon-like big companies do, companies do not want to join in the pay increase chicken game.

“Higher pay is better for sure, but nowadays especially after the pandemic, my hunch is that many workers find values in working remotely or more based on flexible schedules. Companies have to think about the ‘compensation’ package more comprehensively, thinking about designing their own unique compensation ‘mix’. For example, while the base pay level might be lower than Amazon, other employers may allow more flexible time schedule, offer childcare or education tuition support, paid leave opportunities, or greater bonus opportunities.”

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