Reference no: EM132289600

Aetna recently made a startling announcement: the insurance giant increased the base wage of its lowest-paid employees to at least $16 per hour, more than double the federal minimum wage. This increase in pay affects 12 percent of Aetna’s 48,000 employees and has a significant impact on both the employees and the company. The lowest paid employees, who had a base rate of $12 per hour, received a 33 percent increase in pay, with the average increase of those affected being 11 percent. In addition, the company is extending health insurance benefits to nearly 7,000 employees, lowering their out-of-pocket costs by up to $4,000. While the employees are no doubt delighted, this increase in compensation and benefits comes with a very high price tag. The total cost of the wage and benefit enhancements was more than $25 million in 2016. What motivated Aetna to make this move? Well, for starters, the company has estimated that turnover costs them about $120 million a year. Research has shown that low-wage workers are more likely to quit than their higher-paid counterparts. The costs associated with recruiting, hiring, and training new employees can be very high, so a high turnover rate comes with significant hidden costs. In addition, CEO Mark Bertolini thinks that the pay raise will make workers more productive. Many of the lowest-paid workers are employed in the company’s call centers. This can be an extremely stressful job, with callers often upset over what is not covered by their insurance or even the events that led up to their claim, whether it’s damage to their home or car or an illness or injury. According to Kally Dunn, a call center supervisor from Fresno, “When they call,... they’re angry. And so it’s just a lot of de-escalating, calming them down,... reassuring them.” On top of the stress of their job, these low-wage workers face the challenges of paying their day-to-day expenses with such low pay. One of the affected employees from the Fresno call center is Fabian Arredondo. He says, “Finance can be one of the main stresses in people’s lives. And when you can pull some relief away from that stress, I definitely think it makes for—you know, a happy employee is a productive employee.” This is exactly the logic that led Aetna to take this bold move. Bertolini was surprised to find that many of his employees were on public assistance, such as food stamps and Medicare. He was shocked “that we as a thriving organization, as a successful company, a Fortune 100 company, should have people that were living like that among the ranks of our employees.” Aetna was careful to ensure that the raises that they awarded employees were substantial enough to offset any loss of public assistance benefits, so that they truly ended up in a better financial position after the change. Bertolini also believes that Aetna’s shareholders, the owners of the company, are supportive of the change. “We positioned it with them on the economics first, but went to this very notion of ‘this isn’t fair.’ We need to invest in our employees. We need to help restore the middle class, and that should be good for the economy as a whole. And so for us it is as much—probably, for me personally, more—a moral argument than it is a financial one.” Economists Justin Wolfers and Jan Zilinsky recently released a study of the impact of this type of pay increase in privatesector businesses in the United States. Wolfers and Zilinsky found research to support the conclusion that higher wages can improve worker productivity and performance. They cited one study which showed that more than half of the cost of a pay increase can be offset by increases in productivity and decreases in turnover-related costs. In addition, by offering higher wages, companies are able to recruit and hire better employees and decrease disciplinary issues. The benefits of higher wages also extend to quality and customer service. A number of recent studies found that employers reported improvements in both customer service and the quality of production. Aetna is not alone in this strategy. Gap announced that it would raise its lowest hourly wage to $10. The company saw an immediate 10 percent increase in the number of applicants for jobs. And IKEA, the Scandinavian retail giant, recently announced that it was increasing its workers’ base pay to $10.76 per hour. Is this a trend that will continue? Will companies increase worker pay to improve performance and cut costs? Only time will tell.

Think It Over

1. Do you agree or disagree with the notion that increasing pay will directly motivate employees to be more productive?

2. Do you think improving employee benefits would have the same effect as raising pay? Why or why not?