A look at the retail, restaurant, and hospitality industries

In 2021, the retail and hospitality industry saw the return of the customer to their storefront with in-store purchases, dining in restaurants, and a desire to resume travel. Retailers, restaurants, and hospitality organizations must have felt like it was grand opening day when the tourists descended on their favorite vacation spots.

On the horizon was the looming labor shortage. No one knew it was coming or the impact it would have on rewards practices in this industry.

For many years, front-line workers in retail, restaurants, and hospitality received minimal annual increases of around 3%, according to the Mercer US Compensation Planning Survey. However, beginning in late Spring 2021, Mercer started to receive almost daily queries, ‟What are companies paying for front-line workers? We are asking because we are not getting applicants and want to know what we have to pay to attract talent.” Mercer would later observe companies moved to what we call ‟what is it going to take” pay to get people to apply for front-line hourly roles (i.e., cashiers, stock merchandisers, waitresses and waiters, custodians, and room attendants). For the next two years, the Mercer US Compensation Planning Survey reported front-line worker jobs experiencing closer to a 4.0% annual increase. Along with that, everywhere you looked you saw evidence of skyrocketing hiring rates for front-line workers along with a whole host of enticements to get them to take the job and stay.

While the compensation market is more stable in 2024 and recent surveys are showing lower annual increase percentages for front-line jobs, the approach to rewards changed. The higher pay and other sweeteners used to recruit people have become standard approaches to attract, motivate, and retain front-line worker talent.

Proliferation of voluntary benefits and rewards sweeteners

To remain competitive in the market, employers need to design the employee value proposition in the same manner as they design the customer experience. After all, in the retail and restaurant industries and in the hospitality sector, the employee is also the customer. We are observing how organizations have leaned into this new environment through a proliferation of voluntary benefits and rewards sweeteners.

Voluntary Benefits

It is important to define the voluntary in voluntary benefits. In a word, it is choice. The employee can choose the benefit most applicable to who they are as a person. Let’s look at the chart based on researching the voluntary benefits market to better understand what may resonate with different persons.

An objection often heard from companies in the restaurant, hospitality, and retail industries regarding offering benefits in any form to employees is that costs are prohibitive or that pay is the only real motivator. But cost is not a consideration in the case of voluntary benefits. By offering choice, the employer sends a very clear message to the employee: We value you as you are and want to help you meet your needs. Remember, voluntary benefits are an employee cost and the employer is simply making them available.

Rewards Sweeteners

By “sweetener,” we mean the incentive factors used to attract people to front-line jobs and retain the talent in the jobs. Restaurants were willing to pay a candidate up to $50 to appear for a job interview during the 2021–2022 labor shortage. It was also observed that new hourly workers in stores and hotels were paid up to $200 as a sign-on and retention payment, provided they stayed in the job for 30 days.

Mercer’s US Retail Compensation and Benefits Survey reports annually on short-term incentive targets for a long list of jobs in the retail industry, which includes many jobs found in restaurant and hospitality companies. Recently, we have seen these employers making hourly (non-salaried) jobs eligible for short-term incentives in yet another attempt to attract, retain, and motivate their workforce. While the short-term incentive targets have not typically exceeded 5% of base pay, the payout earned can be as much as 6.5%. The number of companies making these jobs eligible for short-term incentives is small but, nonetheless, it reflects another example of sweetening the rewards package.

Experiencing how employers are willing to do what it takes to attract, motivate, and retain talent, employee expectations have risen. Minimum wage is no longer the norm. It is represented by the 25th percentile in the survey data; the median is the competitive wage and, in some geographies, the lower end of the hourly wage scale. More now than ever, we are receiving living wage queries to address rising employee expenditures because of inflation but also as a reconsideration of the compensation strategy for retail, restaurant, and hospitality organizations.

Pay Compression

Although in the past, the retail industry, restaurant sector, and hospitality industry weren’t particularly concerned with paying more than the guy next door, the labor market is tight and wages have increased. Employers with hourly employees now know that they have to be aware of what their local competitors are paying, even when not in their industry.

A significant impact of the increasing wages and hiring rates for the hourly population in these industries is pay compression. Any differentiation employers maintained in the wage-to-job level hierarchy has deteriorated, making the topic of addressing pay compression a top priority. This can lead to challenges in employers maintaining a fair and equitable wage environment.

Recently, the combination of minimum wage increases and labor shortages has further exacerbated this issue, resulting in more frequent instances of pay compression, caused by increased new hire pay rates. As a result, new hires are being paid the same or even more than more tenured employees, causing compression within a job. This happens more frequently in the hospitality industry and restaurant industry, where minimum wages in states have been increased.

It bears mentioning that California’s new law, AB1228, increases the minimum wage in the fast-food segment of the restaurant industry so that workers will earn $20 per hour in coming years. California employers will need to carefully revise their pay structures to ensure the development of a fair and equitable wage environment.

Organizations must maintain a clear understanding of the drivers in wages and the business impact on cost, productivity, and employee engagement. In Mercer’s experience and research, the common drivers for the company and employee run contrary to each other:

• Common drivers for the company: pay grade, job characteristics, and work location
• Common drivers for the employee: employee position within the pay range as determined by their experience and performance

Identifying instances of pay compression and mitigating them requires a systematic approach, including documenting pay drivers and expected pay differences, modeling resolution approaches, and obtaining leadership approval and buy-in to make adjustments. Communication is also crucial to ensure that employees understand the changes and the organization's compensation philosophy.

Pay compression is a complex issue that can have significant implications for organizations and their employees. It is important for organizations to understand the causes of pay compression and to take proactive steps to address it, including conducting compensation studies, resolving pay inequities, embracing pay transparency practices, and implementing a communication strategy to educate employees. By doing so, organizations can ensure that their employees are paid fairly and that they can maintain a positive and productive workforce.

Key strategies

As the market continues to evolve, the data Mercer has collected is indicating the way we approach pay in each industry. Retail, restaurant, and hospitality industries are going to be focused on several key strategies:

(1) The design of the employee experience must be prioritized as much as the customer experience

(2) Pay amounts to much more than hourly wage and merit increases; it should be competitive and include a total rewards package that is built around employee well-being

(3) Voluntary benefits play a crucial role in providing employees with the choice to select benefits that are most applicable to them as individuals

(4) Strategic and adaptive pay approaches need to effectively address the ongoing labor shortages through competitive pay rates in order to attract and retain talent

(5) Organizations need to manage pay compression, particularly as pay transparency continues to be an employee expectation and demand

Expertise at the ready

As you can see, the nuances of attracting and retaining the front-line workforce is as complex as it is critical. Mercer has deep expertise and insights into the retail, hospitality, and restaurant industries as well as the latest in hourly reward practices. Give us a call or send us an email and we’ll connect you with an expert who will be best able to address your questions.

About the Authors

David Kopsch, GRP

Sr Principal

David is a Senior Principal Consultant in Mercer’s Career Business located in Atlanta, Georgia. David assists clients in retail, manufacturing, and financial services on a variety of topics, including career framework, skills and jobs design, and total rewards strategy for developing a compelling employee experience.

Karen Rutledge

Principal

Karen Rutledge is a Commercial Industry Strategist Manager for Career Products at Mercer. She works closely with clients in the Energy, Retail, and Consumer Goods industries to gain prospective on how to enhance future career products to align with each industry needs.

Faith Shiere

Senior Analyst

Faith is a Senior Analyst working in Mercer’s Career practice based in Atlanta, GA. She provides analytical support to senior consultants and clients for a variety of project areas, including market pricing, benchmarking, job architecture, and skill framework development.