Can Paying Higher Wages be Smart Business?

Posted on April 9, 2014 by Chris Kelley Posted in Compensation Consulting, KnowledgePay, Market Pricing

Many employers follow the formula of reducing overhead and employee wages as their way to increase profit. Given that pay related expenses for any business can be the single largest operating expense, it’s easy to see how minimizing wage expense can lead to higher profits.  However, some organizations are realizing that this might not be the best way to optimize profits. The pay check your employees take home is one of the most powerful communications vehicles you have at your disposal and the key message it shows is how much (or how little) you value them. Some business gurus believe that sense of value translates directly into how much effort your employees give on the job and can lead to dissatisfaction and attrition of employees, which leads to higher costs in other areas.  This also has a negative impact on customers and top-line revenue. The jury is out though.  Would paying higher wages positively impact your business?

Many big name companies see the writing on the wall and are changing philosophies.  For instance, Gap, Inc. recently raised the minimum hourly wage for their employees to $9 with plans to increase to $10 an hour in 2015. According to Glenn K. Murphy, Gap’s Chief Executive, increasing wages is an investment in Gap’s employees which will bring many returns to the company.  He said, “. . .To attract and retain the best talent we have to make sure we invest in them.”

QuikTrip convenience stores has proven paying higher wages can increase profits.  QuikTrip values their employees.  They offer employees a “regular wage, a customer service bonus, a profit bonus and even an attendance bonus” according to one manager.  QuikTrip’s philosophy is that if they treat their employees well, the employees will treat customers well.  The customers will then be more loyal to the company.

The numbers don’t lie.  QuikTrip has an employee turnover rate of 13%.  That is drastically less than the top quartile of convenience stores which has a  59% turnover rate.  QuikTrip’s gas sales are twice as high and their per square foot sales are 50% higher than the industry average.  The higher wages are increasing employee and customer loyalty.

On the other hand, a recent Towers Watson survey revealed that higher wages do not necessarily equate with increased employee retention amongst professionals.  In a worldwide study, countries with higher GDP growth tended to also have higher levels of employee attrition. The research revealed that the economy can play a large part in employee retention.  When employees feel insecure about the economy, they tend to stay put in their current jobs, while a healthy economy brought more opportunities and consequently, job movement.

In addition to higher wages, there are other factors to consider in attrition of employees.  Carole Hathaway, Director of Towers Watson’s Rewards practice explained,

“Company culture, good communication, responsive leadership, opportunities for career development and a clear understanding of mission and values within an organisation all contribute to the ‘employment deal’, or Employee Value Proposition and are likely to have an impact on employee retention.” 

Employees want to feel valued.  As in the old fable, you can’t kill the goose (the employee) to get to the golden egg (their productivity).  Increased wages is only a part of the total equation of helping employees feel like more than just egg-producing poultry.

Business owners can also show they value their employees by discovering what is important to them and then giving it to them.  Keeping promises to and showing compassion and appreciation for employees also helps them be happy.  And when employees are happy, your business will grow.  Long-term, committed employees become knowledgeable advocates for your products and services.

study by the Jackson Organization revealed the importance of focusing on employee satisfaction in addition to customer satisfaction.  The findings showed, “Companies that effectively appreciate employee value enjoy a return on equity & assets more than triple that experienced by firms that don’t.”

Begin to reevaluate the messages you are sending to your employees.  Open a dialogue to find out what they need and then try to fulfill those requests.

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