Why Paying Employees More Is A Great Way To Save Money

An assembly line at a Ford plant. Credit: Wikipedia Commons

In 1914, Henry Ford did something dramatic, to the point it made headlines in newspapers across the country – he increased pay from $2.25 a day to $5 a day for his factory workers.

Not that the $5 was guaranteed. Workers got $2.25 daily and the other half was a bonus that was given to them if they did things the “American” way, i.e. they didn’t drink or smoke (also women couldn’t get it unless they were single mothers and men couldn’t get it if their wife was working as well).

Ford, hardly known for his compassion, did not do this out of the good of his heart. Instead, it was all about turnover: the year before, despite decent pay of $2.25 a day, Ford had to hire 52,000 people for 14,000 factory positions because people kept quitting. The reason was assembly line work was a triad of awfulness: it was incredibly boring, incredibly demanding and very dangerous, particularly to the fingers.

Ford’s $5-a-day plan worked. With the higher pay – along with the stipulations, as having people who had children relying on the money and didn’t drink and gamble made for a very committed group of workers – came lower turnover and production increased dramatically. The end result was that Model Ts were actually sold for less, because the company became more efficient.

Another Study

The average wage at Costco is $17 an hour, 82 percent of Costco employees have health insurance through the company (and those 82 percent only pay 8 percent of their premiums) and 91 percent of Costco employees have retirement plans through the company.

The average wage at Sam’s Club is about $11 an hour, less than half of Sam’s Club workers have health insurance (and the ones that do pay 33 percent of their premiums) and only 64 percent of Sam’s Club workers get a retirement plan.

Considering that the two companies are similar, Sam’s Club should be more profitable, right? Not really. Costco’s turnover for employees is 17 percent while Sam’s Club is around 44 percent and Costco’s employees steal significantly less than Sam’s Club employees. The bottom line: despite giving workers better pay and better benefits (or perhaps because of it), Sam’s Club makes $11,615 off the average employee, whereas Costco makes $21,805.

The Point

There are many things that cause turnover in an organization and affect overall productivity. But, on a macro scale like the two mentioned, something becomes clear: higher pay and better benefits generally attract better, more committed employees, who in-turn make more money for their company.

Granted, the key is to hire the right people, and there is technology like VoiceGlance and gamification and dozens of other programs that can help with that, so you aren’t just throwing money around recklessly. But overall, the adage rings true: the best way to become a billionaire is to have millionaires working for you.

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Tags: Ford, Hiring, Human Resources, Salary

Comment by Amy Ala on May 21, 2014 at 10:24pm

Seattle is dealing with the $15 / hr minimum wage concept right now. Here's my thought - and I think it's sort of reflected in your post. Paying someone MORE will not necessarily make that person a better employee. However, a higher paying position will attract better quality workers. Having shopped at both Sam's Club and Costco, any guesses on which one has FAR better service?

If McDonald's workers start getting that $15 min wage they're asking for, they damn sure better stop screwing up my drive thru order.

Comment by David Wells on May 22, 2014 at 11:59am

Considering that the two companies are similar

Actually Paul they are not even close.  

Costco is a specialty retailer with a vastly smaller number of SKU's per store.  They have HALF as many employees per square foot than Walmart or Sam's Club requiring much higher labor productivity.  Thus they pay more because the job requires it!  Not because it is the "right" thing to do, wages tend to flow with productivity. 

Walmart/Sam's Club sometimes offers over 10,000 SKU's in one store and cannot cut back on that because they are not a department store but are often a place where people go for regular weekly shopping.  In fact in stores that have cut back SKU's they have had serious complaints and loss of sales.

BTW as a final note although Walmart/Sam's club has lower profitability by employee they actually have an overall higher profit margin at about 3.4% or over twice Costco's.  Sorry but your analogy is terrible.  

Comment by Keith Halperin on May 22, 2014 at 8:05pm

My standard suggestion to those opposed to increasing minimum wage is to have them (a la Morgan Spurlock) try and support themselves and their family (if they have one) exclusively on it, working 40hrs/week for 30 days.

-kh

Comment by David Wells on May 22, 2014 at 8:09pm

Keith minimum wage was never meant to support a family.  In fact the vast majority of households that have people in it who earn minimum wage are above the national median in income as the person who earns minimum wage is usually a secondary earner.  Increasing wages above productivity tend to lead to layoffs and fewer job opportunities.  

Comment by Paul Petrone on May 23, 2014 at 8:19am

Increasing the minimum wage doesn't really achieve what this article promises. Really, the key is to pay more than what other companies pay. So if the minimum wage increases, everyone will make more, meaning they'll be no competitive edge to paying someone whatever it is. I think this article really is neutral on that issue and instead is all about paying more compared to similar jobs. 

Comment by Amy Ala on May 23, 2014 at 12:07pm

it's an interesting social experiment you're proposing, Keith - but I've busted my ass for 15 years to get to where I am with very little support and zero financial support from others. If one has minimal skills and minimal work ethic I should give you a $6 / hr raise why?

I know there are those who genuinely want to improve their situation and who are working their way through school, etc to be able to earn more. Those aren't necessarily the people I see spitting on the street, screaming and carrying their SEIU sponsored flashy signs.

Comment by Keith D. Halperin on May 25, 2014 at 4:35am

@ David: Please cite your sources. for your claims. Here's my sources.

http://www.bls.gov/cps/minwage2012.htm

http://www.pewresearch.org/fact-tank/2013/07/19/who-makes-minimum-w... It shows that hat the $7.25/hr Federal minimum wage is now about the same (in constant dollars) as it was in 1980.

".  Increasing wages above productivity tend to lead to layoffs and fewer job opportunities."

While you can find studies backed by right wing think tanks like the Cato Foundation (https://www.google.com/#q=who+earns+minimum+wage+cato) and the Heritage Foundation (http://www.heritage.org/research/reports/2013/02/who-earns-the-mini...) which back you up (while citing the same BLs stats I did), a study by the University of California (http://seattletimes.com/html/localnews/2023116005_wageimpactsxml.html) says you are mistaken.

Furthermore:Many economists agree: Raising the minimum wage reduces poverty (http://www.washingtonpost.com/blogs/wonkblog/wp/2014/01/04/economis...):

Let’s first highlight the major results. Dube (the analyst quoted in the op-ed piece) uses the latest in minimum-wage statistics and finds a negative relationship between the minimum wage and poverty. Specifically, raising the minimum wage 10 percent (say from $7.25 to near $8) would reduce the number of people living in poverty 2.4 percent. (For those who thrive on jargon, the minimum wage has an “elasticity” of -0.24 when it comes to poverty reduction.)

Using this as an estimate, raising the minimum wage to $10.10 an hour, as many Democrats are proposing in 2014, would reduce the number of people living in poverty by 4.6 million. It would also boost the incomes of those at the 10th percentile by $1,700. That’s a significant increase in the quality of life for our worst off that doesn’t require the government to tax and spend a single additional dollar. And, given that this policy is self-enforcing with virtually no administrative costs while challenging the employer’s market power, it is a powerful complement to the rest of the policies the government uses to boost the living standards of the worst off, including the Earned Income Tax Credit, food stamps, Medicaid, etc."

Folks, we're at a fundamental difference in philosophies here: I believe that most people in poverty are trapped and can't get out of poverty "by their own bootstraps", so there needs to a "safety net" to keep people from slipping into destitution, particularly children. Some of you believe that most people in poverty are not trapped in poverty and can get out of poverty "by their own bootstraps, so there doesn't need to be a "safety net" to keep people from slipping into destitution, particularly children, or at least it shouldn't be increased.

Some of you may have been poor, and believe that if you could make it out, so can anybody/everybody else. I don't believe that.

Here are some statistics about poverty in the US (http://en.wikipedia.org/wiki/Poverty_in_the_United_States):

-kh

Comment by Sandra McCartt on May 25, 2014 at 1:04pm
Noble thought Keith, but consider this. All theses people you are talking about trying to support a family or CHILDREN on minimum wage are not. They qualify for and receive in most cases, gov. Assistance in terms of food stamps, wic, chip (healthcare for children), housing assistance, in some cases utility assistance. This is based on their income.

Take food stamps alone. At min. Wage they receive aprox 400.00 a month in food stamps. At 10.10 an hour their food stamp amount is cut to aprox. 200.00 a month. Housing allowance is cut by aprox. 300.00 a month. They no longer qualify for utility assistance and may not qualify for other assistance. Do the math. The raise of 3.00 an hour ( using round numbers) is 120.00 a week roughly 500. And change. They lose aprox 500. A month and in most cases more in terms of assistance they receive so in many cases they are worse off than they were at min. Wage. I just worked this problem with a young lady who is trying to better herself by getting a better job. Although she would like to be off welfare she turned down a better job because she would lose over 200.00 a month and couldn't make ends meet.

I think these people protesting are in for a shock if they get what they want. It seems to me to be a somewhat clever way for the gov. To say they have raised the minimum wage and reduced the welfare rolls. The stats will prove that is the case but I think in many cases the people who get that raise are going to wake up still trapped in poverty.

Unless of course they decide to stay in school, quit having two or three kids with different baby daddies or fathering four or five kids they can't or won't support.

The only answer I can see now that we have created three generations of welfare receipants is to start gov. Programs where everybody drawing gov. Assistance works in programs where they can receive training in a trade while they are receiving assistance. We did it with the CCC and WTPA after the depression. Got lots of infrastructure built, instilled some knowledge and pride in people because they worked for their money. They learned how to weld, operate heavy equipment, do payroll and keep a set of books then went into the private sector with marketable skills.

When we start paying people more than what a job is worth they don't learn anything, won't be better off and won't have any more marketable skills. We will however, shift the cost of welfare to the employer who may replace the unskilled worker with technology or be able to hire someone with more education and skill than what they get for min. Wage now. The unintended consequences of paying people based on what it takes them to support a family rather than paying them for what they can do may be shocking to those who need it the most.
Comment by Sandra McCartt on May 25, 2014 at 1:17pm
And don't forget that when wages go up so does the cost of goods and services. It won't bother me much if the cost of a happy meal goes up two dollars but I suspect it will bother the single mom trying to feed three kids if it costs six dollars more after she got a three dollar an hour raise. Inflation hits the poor worse than the middle class.
Comment by Keith Halperin on May 26, 2014 at 11:44am

@ Sandra: It's clear to me that when you start talking "baby daddies" etc. we'll have very little point in continuing to talk about this, beyond agreeing that a big *public works project hiring millions of willing and hardworking people would help America.

-kh

*These programs didn't just train people- they HIRED them at a decent wage for the time. (http://en.wikipedia.org/wiki/Works_Progress_Administration) "At its peak in 1938, it provided paid jobs for three million unemployed men and women, as well as youth in a separate division, the National Youth Administration. Headed by Harry Hopkins, the WPA provided jobs and income to the unemployed during the Great Depression in the United States. Between 1935 and 1943, the WPA provided almost eight million jobs.[3] Full employment, which was reached in 1942 and emerged as a long-term national goal around 1944, was not the WPA goal. It tried to provide one paid job for all families in which the breadwinner suffered long-term unemployment.[4] Robert D. Leighninger asserts that “The stated goal of public building programs was to end the depression or, at least, alleviate its worst effects. Millions of people needed subsistence incomes. Work relief was preferred over public assistance (the dole) because it maintained self-respect, reinforced the work ethic, and kept skills sharp."[5]"

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