Aetna Pay Raise Rationale Cites Turnover Cost – Finally!

Fred WhittleseyConscious Compensation: The Impact Compensation Blog

Today”s Wall Street Journal reports that the CEO of Aetna expects a “groundswell” in employee pay increases this year.

Aetna announced in January that it would increase employee base pay to a minimum of $16 per hour, leapfrogging the new rates announced by Wal-Mart, McDonald’s, and T.J. Maxx.

The discussion about the motives of these companies’ moves to increase compensation levels of their lowest-paid employees ranges from speculation about clever PR moves to a true change in labor supply and demand.  Aetna’s CEO Mr. Bertolini took a conscious position on this:

“Corporations can make the investment in their communities and their employees, and we can improve the middle class as a result.”

The article states “Raising employee pay and offering workers better benefits will cost Aetna $26 million annually. Mr. Bertolini said executives under pressure to reduce expenses could find that bill hard to swallow.

But he expects higher wages to allow his company to realize some offsetting savings by reducing the $120 million spent each year on costs related to employee turnover.”

Hurray.  A major US company CEO steps forward and admits that employee turnover has a hard-dollar cost, not identifiable on financial statements, not easily calculable, yet doubted by few. And has social impact.  Win-win-win-win-win.

Thank you, Mr. Bertolini, for confirming the work that I have been doing since 1981, beginning with Dr. Eric Flamholtz at UCLA and more recently in my book chapter in The Compensation Handbook.  Yes, it’s real, and despite the accountants’ refusal to calculate it, we in finance can calculate it and make good business decisions from it.

Aetna will spend $26 million on its pay raise initiative and “realize some offsetting saving by reducing the $120 million spent each year on costs related to employee turnover.”  Frankly, I think that is too conservative a calculation.  All in, employee turnover is many times more costly than companies realize, or calculate.

I have done the calculations.  The numbers are huge, and the ROI is huge.  Plus, these actions…”make the investment in their communities and their employees, and we can improve the middle class as a result.”

Pay increases got that going for them, which is nice. If you care about Conscious Compensation.

I’ll be at the Conscious Capitalism conference starting tomorrow.  If you’re there, find me and answer “how do you pay employees?”