Minimum wage momentum continues to surge across the country. Last week, Washington, D.C. joined San Francisco, Los Angeles, and Seattle in raising its rates to $15 an hour. That’s huge news if you’re a CFO, because the impact could resonate across the country. And trying to prepare for the future with forecasting alone won’t cut it.
That’s where scenario planning enters the picture. With scenario planning, you can proactively model for the future and see the business environment with more clarity. It helps you make better strategic choices and prepare for uncertainties—like wage hikes. Also, scenario planning with cloud-finance automation frees up time to deliver actionable insights to accelerate business performance.
Up, up, and away
Fourteen states started 2016 with higher wages than the year before, and both New York and California passed state laws this year that will raise the minimum wage to $15 an hour over the next few years. But businesses in the heartland would be remiss in thinking this trend is limited to the coasts. In Cleveland, more than 100 local unions are pushing for a resolution to establish a citywide minimum wage of $15 per hour for any business with 25 or more employees. The resolution doesn’t take a phased approach so, if passed, it would effectively double the payroll for some small businesses used to paying the statewide minimum of $8.10 an hour.
Scenario planning drives value
Whether or not their business operates in a location directly impacted by one of the wage hikes, savvy financial leaders understand the sustained momentum will almost certainly impact their business at some point. The question becomes not if, but when and how to respond. Taking a proactive approach—and using scenario planning to model potential future events—rather than taking a reactive, wait-and-see approach can mean the difference between keeping your best talent and competitive edge—and losing them.
A March survey of senior financial executives found that nearly 75% of minimum-wage paying firms would reduce current or future employment if the minimum wage is raised to $15 an hour. “The math is not as simple as ‘increased minimum wages = immediate layoffs,’” Campbell R. Harvey, a Duke University professor and founding director of the university’s quarterly CFO Global Business Outlook survey, explained in the report. “It is more nuanced.”
City or state increases could spark local talent wars, as more entry-level workers migrate to nearby areas with higher wages. It wasn’t legislation that nudged Target to increase its minimum hourly wage to $10 an hour in April, after all. When rival Walmart increased its own rates earlier this year, Target buoyed its minimum pay to stay competitive in the retail talent wars. National corporations faced with radically uneven minimum wages may also consider re-balancing their portfolios—moving more swiftly to close poorly performing locations or canceling expansion plans.
Modeling various scenarios
CFOs are already modeling various scenarios based on what the minimum wage hits and where. If the minimum wage rises to $10 an hour, 20% of affected firms would reduce employee benefits, while 43% would raise consumer prices, according to CFO respondents. If the wage hike hits $15 an hour, those numbers climb, with 66% trimming benefits and nearly half raising prices.
Companies that are able to absorb the additional payroll costs without slashing headcount may find that the effects extend far beyond the lowest-wage workers. Wage compression is already plaguing some companies, with managers and more tenured employees irked that their pay is suddenly on par with entry-level workers. Getting those more senior employees to stay put can mean raises farther up the career ladder or the outlay of additional perks, like more paid time off.
Opportunities to innovate
But the strongest scenario planning doesn’t only buffer a company’s bottom line against possible doom and gloom on the horizon—it also sheds light on chances to innovate. Some 70% of CFOs say a higher minimum wage would push them toward automation. And tech companies and robotics manufacturers alike are champing at the bit to inject next-gen processes into industries that have been largely stagnant for decades.
Scenario planning is the most streamlined and effective way to model how your company could respond to proposed increases. And with robust scenario planning, you’ll have the roadmap, capital and talent in place so you can respond swiftly—no matter what the future brings.
To learn how your fellow CFOs are remaining agile through multiple scenario planning, read the Adaptive Insights “CFO Indicator Q1 2016: Big Data, Better Vision: The Agile CFO” survey.