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Learning Corner With Jeffrey Pfeffer: Employers Can—and Should—Make Every Day Pay Day

Jeffrey Pfeffer

Professor of Organizational Behavior, Stanford University

When a former participant in a Stanford executive program invited me to join the advisory board of PayActiv, a company providing employees access to their earned wages between pay periods, I had no idea about the pressing need for what has become a growing industry and movement. Yet giving people access to their money more quickly represents one small but important step to reducing an epidemic of employee financial stress.

Like all forms of stress, financial stress negatively impacts people’s psychological and physical health, an issue very much on my research agenda. Moreover, it adversely affects employee turnover, absenteeism and presenteeism. In fact, one in three employees say that personal finance issues are a distraction at work.

Here’s why human resources departments should embrace the movement to make every day a payday.

Let’s Look at the Problem

Unless you are a day laborer or a participant in the "gig" economy—in other words, if you are a regular employee—odds are extremely high that you are going to be paid for your work some time after you did it. According to the U.S. Department of Labor, only nine states require weekly pay, and some of those states have exceptions. In other states, employers can pay people every two weeks, semi-monthly (like my employer, Stanford) or even monthly.

Consider the fact that in the second quarter of 2019, median weekly earnings were $911 for full-time wage and salary workers. With seven days in a week, that means the median worker is earning $130.14 per day. If someone is paid every two weeks, they will have accrued but not been paid earnings of around $1,301 (minus tax withholdings and deductions) after 10 days.

The fact that people are paid what they have earned some time after earning it may not seem like a big problem, but data shows many people in the U.S. are in a financially precarious position. The annual survey conducted by the American Psychological Association consistently finds that money and work are the two leading sources of stress, with these levels only rising. Even among employees earning more than $100,000 annually, PwC’s 2017 Employee Financial Wellness survey shows that 28 percent found it difficult to meet household expenses each month, and 58 percent consistently carried credit card balances.

The Current "Payday" Industry Is Enormous—and Wildly Expensive

The payday lending and "check cashing" industry arose in response to people’s needs for small, presumably short-term loans to tide them over until they receive their next paycheck. And business is booming. There are now more payday lenders in the U.S than McDonald’s or Starbucks. A study by the Consumer Financial Protection Board found that almost half of the borrowers had done 10 transactions, and the median fee was equivalent to an annual percentage interest rate of 322 percent.

Meanwhile, Flexwage estimates that people are paying $32 billion in bank overdraft and insufficient funds fees and $6 billion in lending fees at U.S. pawn shops. Along with the $9 billion in estimated payday lending fees and high interest rates, that’s close to $50 billion being paid each year by some of the poorest and most financially stressed Americans. And it turns out this is something that should concern HR managers, too.

Financial Stress is a Giant Problem—for Employers

PwC’s survey reported that employees who were worried about their finances were five times more likely to be distracted at work and nearly twice as likely to spend three hours or more at work dealing with financial matters. Stressed employees were also twice as likely to miss work and more inclined to cite health issues caused by financial stress, the survey showed.

This massive productivity and engagement cost is one reason that a 2019 Bank of America survey found more than 50 percent of employers are now offering financial wellness programs as an employee benefit, a doubling in just four years. Such programs can include education about budgeting, direct deposit of wages to a bank to avoid check cashing fees, retirement savings plans (which less than half of employers offer in any form), income smoothing for people in jobs where pay varies significantly over time and programs to have employees automatically deposit a set amount or percentage of their pay into a savings vehicle.

One Simple Step Toward a Solution

These are all helpful options, but there’s a better solution: Simply offering employees quicker and easy access to their money will go a long way toward increasing productivity, improving retention and even attracting more applicants (who won’t need to deal with the unnecessary added financial stress that comes from dealing with predatory lenders).

Most earned wage providers, such as Flexwage, Instant, and PayActiv, sign up employers—who, in many cases, pay the nominal fees (which vary by vendor and specific customer but are typically on the order of 3 percent) on behalf of their employees. Employers then offer the option, which often includes a debit card and no-fee access to ATMs, to workers.

To be clear, this will not solve all of your employees’ financial problems. For instance, if people aren’t earning enough money, providing better and quicker access to an inadequate wage won’t eliminate their financial stress. If people are doing a poor job of financial planning and budgeting, accessing their wages more readily won’t suddenly make them better financial managers.

But it just might reduce at least some of the overdraft fees and high interest costs that make their precarious financial situation and resulting stress even worse. And reducing financial stress, by any amount, can only benefit workers and their employers.

Image: Creative Commons

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A New Poseidon Adventure: Flipping Succession Planning Upside Down

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A New Poseidon Adventure: Flipping Succession Planning Upside Down

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The Hidden Costs of Ignoring Your Talent Management Strategy

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The Hidden Costs of Ignoring Your Talent Management Strategy

Building and maintaining a successful company hinges on having the right people to execute projects and drive results. People, we hear time and again, are your company's most valuable asset. But their success — and HR's ability to recruit, engage and retain them — depends on HR pros who are strategic decision-makers, armed with the proper tools to let them excel at their jobs. Modern HR professionals manage much more than payroll and benefits. But their technology tools, in many cases, haven't evolved past basic productivity software like email or Microsoft Word. HR simply can't be strategic with old-school tools that reduce people to statistics and give little insight into what the numbers mean. Emails and spreadsheets were not designed to deliver meaningful insights into people's performance, suggest when employees should be promoted or highlight skills gaps in a company. For that, HR needs a broader, more strategic set of talent management tools, which lets professionals manage every aspect of the workforce, from training and performance reviews to collaboration and succession planning. Yet, research shows that less than 25% of companies use a unified, holistic approach to their talent management. The Real Costs of "Doing Nothing" As a Talent Management Strategy The critical relationship between business strategy and HR strategy too often gets overlooked by senior leadership. While it may seem like the company is saving money by managing recruiting, training, performance and succession via manual and paper-based processes, in reality it’s costing your business more than you know. For example: Without a talent management strategy, a company with 2,000 employees is losing almost $2 million every year in preventable turnover alone. Businesses that don’t invest in learning suffer from decreased employee performance and engagement to such a degree that they can expect to realize less than half the median revenue per employee. That’s a direct impact on the business. In employee performance management, organizations without a focused strategy waste up to 34 days each year managing underperformers and realize lower net income. To learn more about the business impact of talent management and how to start building out your strategy, check out the eBook Why Your Nonexistent Talent Management Strategy is Costing You Money (And How to Fix It) and register for the March 19th webinar, Building the Business Case for Talent Management.

The Return of the Moderate Merit Budget – Wreaking Havoc on Pay for Performance

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The Return of the Moderate Merit Budget – Wreaking Havoc on Pay for Performance

With the economy now on steadier ground, most organizations have returned to administering a merit budget to the pre-recession levels of 3 to 3.5%. In the years immediately following the economic downturn, many merit budgets were eliminated entirely or were reduced significantly and reserved for a select segment of the employee population. Pay for performance has become a necessity for many organizations that are expected to accomplish more with fewer resources. I often get asked: "How can I truly award my top performers with such a limited budget? Should I do so at the expense of my ’Meets Expectations’ performers? What if I need to retain my ’Meets Expectations’ performers and giving them 0% to 2% increase puts me at great risk for turnover? But if I don’t recognize my top performers, don’t I risk losing them...?" These are difficult questions to answer, however you can determine the best solution for your organization by considering the following: Are your employees paid at market pay levels? Is your organization’s performance management process mature? Does your organization have other compensation programs in place to reward top performers (e.g. variable pay)? Market Pay If turnover is a concern, and your organization needs to maintain ’bench strength’ in order to achieve its strategic objectives, your biggest priority should be to ensure that you are paying your employees at market pay levels. Why? Historically, as the labor market strengthens, organizations become vulnerable in terms of losing people. Hiring and onboarding replacement talent is not only costly to the organization, but can also cause dissension among existing employees since new hires may be getting paid more. Be sure to stay abreast of market pay levels and trends, and use the merit budget to correct disparities. Performance Management Process Organizations vary significantly in terms of the maturity of their performance management process. Closely examine your organization’s process and look for ways to improve it. If there is a perception that one management team is an ’easier grader’ than the others, the process is inherently flawed and any pay for performance program will not be viewed as credible and fair by employees. A good place to start is to get a calibration process in place and communicate broad guidelines on expected distribution ratings. Variable Pay Programs Variable pay programs (e.g. bonuses) have become increasingly more popular across all industries and career levels. These programs provide the opportunity for employees to share in the organization’s success while not adding to fixed payroll costs. Some plans have an individual performance component which can be a very effective means to recognize top performers. However, in order for this type of program to be successful, individual goals and targets must be well documented and communicated. Again, this is largely based on the maturity of the organization’s performance management process which takes time to evolve. What are the best steps to avoid wreaking havoc on your pay for performance process? First ensure your pay levels are keeping pace with the market Continue to evolve your performance programs with calibration among managers and a rigorous goal setting process Promote variable pay plans to reward high performers without adding to fixed pay roll costs It’s not always an easy journey but, in the end, it’s best to use a measured approach that is based on business needs and a realistic assessment of your current programs and processes.

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