Banks’ payoff from minimum-wage hikes
When Fifth Third Bancorp announced last year that it would raise its minimum hourly pay to $15, John Sieg was inundated with emails from many of his 800-plus employees, but one still sticks out in his mind.
The note came from a teller who had two children and was living with her mother because she could not put down a deposit on an apartment. With the $1,000 bonus check and pay bump the bank gave after tax reform, the teller could now afford both the deposit and rent on a new place. The increase from $12 an hour ultimately translated into an extra $6,000 a year for that employee — a big difference in a market like Cincinnati.
Raising minimum wages may make for feel-good PR, but in a tight job market, it is also described as a necessity. Bankers who work with the rank and file say it has been well worth the investment, too, since happier, financially secure employees mean less turnover and by extension, a better experience for customers.
“It absolutely has a positive impact on stronger productivity and profitability,” said Sieg, a retail banking executive at Fifth Third. “If you think about just the client experience, our clients want to be known, they want to feel valued, they want to know that Fifth Third is building a relationship with them, and retaining an employee really gives us that opportunity.”
Even as banks downsize and automate some jobs out of existence, industry wages are rising at all levels. Though raises can put pressure on expenses, better pay is an effective recruiting and retention tool in an ever-shrinking talent pool. Banks that increased their minimum wages after the tax reform law was enacted say they are already seeing lower employee turnover as a consequence.
Defending expenses on PNC Financial Services Group’s latest quarterly earnings call, CEO Bill Demchak told an analyst that “we're already seeing lower attrition rates” because of the company raising its minimum wage to $15 per hour.
The $142 billion-asset Fifth Third has been more specific. In the first nine months of the year, the company has seen a 15% decline in turnover among operations staff, including those in its call centers, and a 24% decline in turnover among retail staff.
Bob Shaffer, the company’s chief human resources officer, said he was “very pleased” to see that decline in turnover. He credited a host of other benefits alongside the pay bump, like its maternity concierge service, longer parental leave and financial empowerment courses for employees.
“If we have a 20% lower turnover in those jobs, it certainly translates into significant savings in acquiring talent, onboarding them, training them, retaining them,” he said.
Lower turnover also means more efficiency and continuity, which is especially important in customer-facing roles, Shaffer said.
“Not only are our customers dealing with the same person, but it’s an experienced person, so that has a hugely positive business impact for us,” he said.
Sieg added that retaining employees for longer provides a bank a strong source of potential talent for higher-level jobs within the company.
“Because they stay here, I have an opportunity to put really good quality development plans together and give them good career paths that, if they had left earlier maybe they wouldn’t have even had a chance to explore,” he said.
Recruiters and analysts say wage costs have been rising across all job classes and asset sizes in the industry for some time, and only partly because the industry has not done a good job of developing talent internally.
“We’re certainly seeing wage inflation on a broader scale, and some of that is tied to banks that operate in locales that either raised the minimum wage or banks have gotten ahead of that by voluntarily raising wages,” said Aaron James Deer, a managing director with Sandler O’Neill. “Whether it’s for front-line bankers or people in the back office, there is real competition for those folks.”
The move away toward a universal banker model may mean offices are staffed a little thinner, but it also means banks need to pay up for that staff, said Susan Pardus, a partner at KLR Executive Search Group in Boston.
“Those individuals have a higher skill set and have to have a higher level of education and emotional intelligence because they’re handling more than just the teller role today,” Pardus said. “We’re seeing more and more banks going to that model where they’re investing more in their professionals, so they have to pay a higher wage.”
It also means that banks are increasingly competing with other industries for some of that top talent, said Brian Dresch, a client partner with Korn Ferry. As companies like Amazon respond to public demands for a $15 hourly wage, banks often must raise pay to compete.
“When you think about these hourly employees, for this kind of talent pool, you’re competing across other industries,” Dresch said. “Yes, there is some specialty when you get into some of the other product areas, but for front-line staff, you’re picking from a broader group.”
One of the most eye-catching announcements was by the $96.1 billion-asset First Republic Bank, which raised its minimum hourly pay to $25.
While wage growth has been a good thing for employees, it may ultimately drive further consolidation in the industry, particularly among community banks.
“The cost of talent for these banks is going through the roof. It’s the second-largest expense to their core provider,” said Cameron Boyd, who is director of the banking practice at Smith & Wilkinson, an executive search firm in Scarborough, Maine. “I think it predates the tax reform, it predates anything that’s happened in the Trump administration. The talent shortage has been going on for a while.”
The $4 billion-asset Amalgamated Bank in New York raised its minimum hourly pay to $15 back in 2015, mostly in response to the “Fight for $15” labor campaign, said President and CEO Keith Mestrich.
Amalgamated did not have many employees who made less than that before it raised its minimum pay, Mestrich said. But in addition to lower turnover and improved customer experience, he said better pay for lower-wage staff can also help to buffer bank reputations at a time when consumer trust has seen better days.
“This is an important part of rebuilding the reputation of the banking industry in the world, and I don’t think we should lose sight of that,” he said.