Pay people more


My late father used to say that when you pay peanuts you get monkeys.  He may have been on to an old management idea beginning to percolate again. The idea — at odds with conventional wisdom — is that paying people more may boost productivity and reduce cost by increasing employee engagement, reducing attrition and attracting new workers. Though this approach would be unrealistic for many companies, it may be worth pursuing for certain industries and some minimum wage jobs given the problems with traditional approaches.

Organizations are facing strong headwinds.   Margins remain tight, generating real innovation is difficult and consumer demand remains uncertain. Over the long run, managers face looming labour shortages and possible technological disruption.

The productivity puzzle

To cope, firms have implemented headcount reductions, wage freezes and supply chain rationalizations.  Though these have been successful they can only go so far.  The only fertile area left to significantly improve performance is to boost employee productivity.  Yet, increasing worker productivity is easier said than done, for many reasons. For one thing, most companies suffer from chronically low employee engagement (typically only 35% of workers are positively engaged). High employee turnover, poor or non-existent training and pervasive skills gaps also act as brakes on raising worker productivity and containing costs.

It would be naïve to think these problems do not have a compensation component.  Would a wage increase help address these issues?

A novel fix

In 1914, Henry Ford, the father of mass production, famously doubled pay at his factories in order to fight attrition but also so that Ford’s assembly line workers could afford to buy the cars they were making. This strategy paid off immediately and impressively, generating:  higher employee productivity, improved retention, a flood of new applicants and a major boost to the American economy.  The challenges faced by Ford in 1914 would be familiar to many executives today in the retailing, hospitality, construction and manufacturing sectors.

Some recent business cases support the notion that paying people more will generate higher productivity and help cut costs.  For example, Forbes magazine reported companies can reduce the high cost of employee turnover and retention (expenses that can run in the tens of millions of dollars), and job dissatisfaction by paying a higher starting salary and offering more benefits up front. They cite leading retailers like Costco, Trader Joe’s and Zappos as examples of firms that pay and train more, and in turn achieve significantly higher retention and performance levels.  All of these firms have done the math and figured out it’s cheaper and more beneficial in the long run to pay higher starting wages and deliver high value training. According to Lloyd Perlmutter, veteran retailer and president of The Beacon Group, a retail and organizational consultancy: “While base compensation is an important factor for front-line employees, people also respond to cash incentives, fun contests and any additional training and development to add to their skill sets.”

Providing more compensation to some employees can make sense for other reasons. Like Ford, offering higher pay signals to its workers and the market that the firm recognizes employees, values performance and is willing to pay for it.  This enhanced reputation may attract more workers than a company with a low-pay reputation. In addition, a pay increase for some employees may end up being less costly in the long run than the cumulative cost of multiple employee engagement initiatives (the dirty little HR secret is that most fail), dashed worker expectations and wasted management time.

Ask the right questions

Management should tread carefully; many employees are already at the top end of the pay scale or are in non-permanent jobs.  Before committing to a blanket pay increase, managers will want to explore two key questions: 1) what is the true productivity and cost hit of high employee turnover and dissatisfaction and; 2) If the answer to #1 is significant, what wage and/or benefit increase can move the needle without busting the corporate bank.

Dip your toe

Not every industry or business will be a good candidate for a wage-based fix. To test the hypothesis, managers should experiment first with low-performing business units, focusing on minimum wage jobs. Ideal situations will be companies that:

  • Feature high levels of turnover
  • Have difficulty finding employees with the right skill sets
  • Employ low-level workers who can directly impact revenue

Increasing compensation is not a sop to socialists, although one could make an argument that reducing pay disparities is a socially worthwhile goal.  Paying some workers more can make business sense by reducing costs in the long run and kick-starting revenues. Savvy managers should pilot this strategy in a contained department or business unit and carefully study the results.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

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