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Wage Drift: Definition, Causes, Examples

Wage Drift: Definition, Causes, Examples
Wage Drift: Definition, Causes, Examples

Sometimes a company can experience an unprecedented demand that will call for employees to put in extra hours. In doing so, wage drift will occur. But what does wage drift involve, and what are its implications? Keep reading to find out!

Defining Wage Drift

Wage drift is the difference between the wage that was negotiated with the employee by a company and what is actually paid at the end of the work period to the employee.

Causes

Common causes of wage drift are:

1. Overtime – during a period of unprecedented demand, a company may require employees to work overtime. In such an event, companies are legally obligated to pay employees at a higher rate than the base wage for the overtime hours contributed. However, companies should be mindful that overtime should only be paid when the wage negotiated did not include an overtime component.

2. Bonus – bonus payments are paid on top of base wages. They can be a specific amount paid as a lump sum or on an hourly basis. Usually, they are offered to employees who exceed work expectations - or to all employees when a company achieves a business objective or milestone ahead of schedule.

3. Shortage in the workforce – when a company has difficulties hiring new or extra employees due to shortages in the labor market, it can result in the current personnel needing to work longer shifts.

Ways In Which Wage Drift Can Occur

From the causes detailed above, wage drift often occurs due to a resulting increase in the final salary paid in line with overtime, bonuses earned, or workforce shortages beyond a company’s control.

But wage drift can also happen when the salary or wage paid remains the same, but the workforce was underutilized. This causes a reduction in output - resulting in an increase per unit cost for the company.

Wage drifts may arise when uncontrollable factors such as sudden upticks in market trends force an increase in demand for a product. Another uncontrollable factor that could impact wage drift is the overall economy. For example, during the financial crisis of 2008, wage drift drastically increased. This severe wage drift movement directly resulted from tightening labor markets, causing wage components like overtime and bonus pay to increase more rapidly than the basic salary.

In general, wage drift tends to increase during times of strong GDP (Gross Domestic Product) growth - and it falls when the GDP slows down and the economy shrinks. In other words, overtime and bonuses are considerably more during periods of economic boom and are less prevalent when there is a recession.

Disadvantages of Wage Drift

Wage drift gives an employee a higher wage rate than the national wage rate. This is great for the employee, but not so much for the company. One major problem wage drift poses for the human resource department is the inability to predict and budget for these fluctuating wages and difficulties in setting fixed wages.

If wage drift is left unchecked, it can lead to inflation. This is particularly a concern when the rise of earnings is disproportionate to worker productivity. Suppose employees earn more than what was predicted from contractual negotiations, and total production remains stagnant. In that case, there will be more money chasing the same number of products leading to overall price increases.

An efficient way to stay on top of potential wage drift issues is by utilizing an automated HR platform such as Lanteria. With the Lanteria HR software, you can keep track of productivity and employee work hours while easily streamlining and monitoring all other important HR processes – leaving you more time to focus on other complex tasks.

For more information on how Lanteria can assist you in your HR needs, contact us today and arrange a free demo!

 

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