When Amazon announced it was increasing the minimum wage that Amazon employees in the U.S. would make to at least $15 an hour earlier this month, its move was greeted with cheers. (Literal cheers.) 

But then some people began to read the fine print.

They noticed that even while Amazon was making headlines for increasing hourly wages, it was also phasing out some other compensation programs, like some restricted stock options and bonuses.

That meant some employees might actually take home less under the new, much-lauded salary scale than they would have if Amazon had just left everything alone.

"It's not a pay raise," said one employee quoted in The Seattle Times, which reported on all of this. "It's a slap in the face."

It had the makings of a nightmare, and it threatened to undermine all the goodwill that Amazon had generated with its announcement.

So, on Wednesday, Amazon said it's facing the issue head-on, by revising the amounts of its raises and promising that no employee will see less compensation as a result of the changes.

Here's an example of how the pay raises actually threatened to backfire.

  • When Amazon announced the $15 minimum, it also announced that employees who were already making $15 an hour would now be paid $16 an hour.
  • But at the same time, it was reportedly going to do away with a $2,000 annual bonus program that rewarded employees with great attendance and productivity.
  • So, that meant employees were getting a $2,000 raise on the one hand (assuming they worked 40 hours a week, 50 weeks per year), but losing a $2,000 bonus on the other hand.

Worse still, this washout only affected the best employees--meaning if you were a marginal performer who just skated by, you got the raise, but truly excellent workers wound up getting nothing.

It's a fairly easy fix--all Amazon had to do was announce that under its revised scheme, employees who previously got $15 an hour will now make $16.25. That works out to a $500 a year raise over the old system.

Separately, Amazon also said workers who have good attendance during the crucial month of December will get a $100 bonus. And Amazon is also establishing cash bonuses for tenure, from $1,500 to $3,000 for five-, 10-, 15-, and 20-year milestones.

"All hourly Operations and Customer Service employees will see an increase in their total compensation as a result of this announcement. The significant increase in hourly cash wages effective Nov. 1 more than compensates for the phaseout of incentive pay and future (stock) grants," Amazon said, according to Bloomberg.

Amazon will also roll out a direct stock purchase plan for employees in 2019, according to Bloomberg.

Without any direct evidence, my sense here is that the problem Amazon had to deal with was more likely the result of bureaucratic nearsightedness, as opposed to a sneaky plan to publicly raise wages while privately sucking out part of the value on the back end.

I could be wrong, but I've never found it profitable to bet against incompetence in big bureaucratic organizations. But the whole situation also points out how seemingly simple points in any compensation package can wind up being a little sticky.

As I calculated earlier, this pay bump is going to cost Amazon at least $1 billion over the next year--probably a lot more. (Math at the end of this column.)

And the potential cost of playing around on the edges here is probably much higher than that. So it's smart for Amazon to recognize the issue and correct it properly as quickly as possible.

By the way, here's my math on the total Amazon pay raise:

  • Amazon says an estimated 350,000 employees will benefit from this. 
  • Some are now earning less than $8 an hour, so assume $10 an hour on average. 
  • Multiply a $5 average raise by 350,000 employees, and you get $1.75 million per hour.
  • Assume they all work an average of 1,000 hours a year (which would be 50 percent, part-time). 
  • You wind up with a $1.75 billion outlay. That's a conservative number by my estimate.

How Jeff Bezos Is Spending His Multibillion-Dollar Fortune
Published on: Oct 11, 2018