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.

Comment by David Wells on May 27, 2014 at 1:37pm: Keith,

Let me address a couple of main points and then get into a more detailed response.

First I would be wary of using the study in your Washington post article. The study they cite was conducted by Arin Dube relying HEAVILY on research done by Card and Krueger. The study conducted by Card and Krueger is one of the most highly debunked studies in macroeconomics as their methodology was terribly flawed.

Second you highlight a study from CATO. CATO is not right wing, I suggest you look at their studies related to military spending, drug wars, incarceration etc. They are libertarian and have fundamental differences from conservative politics on numerous issues. If you are going to see they are “right wing” and then quote a study from Berkeley, one of the most rabidly leftist institutions on the planet, it makes me second guess your ability to see through biases.

To answer your inquiries;

First understand where minimum wage started. Have you ever read the FLSA and its surrounding documentation? The FLSA was never designed to provide a completely livable wage. Check out the following study that provides the back-up documentation to the FLSA and gives numbers relating who earns minimum wage.

http://americanactionforum.org/research/primer-minimum-wage-and-com...

Detailed break out of who earns minimum wage:

http://www.pewresearch.org/fact-tank/2013/07/19/who-makes-minimum-w...

Its heritage so you probably wont like it but highlights of households with minimum wage earners.

http://www.heritage.org/research/reports/2013/02/who-earns-the-mini...

Chart highlighting the PURCHASING POWER of minimum wage. As you will see the $7.25 in today's dollars actually puts it at the mid range of the wages purchasing power lower that it was in the 70’s but higher than it was in the 30’s when enacted. The purchasing power of the wages are often overlooked but critically important.

http://economy.money.cnn.com/2013/02/14/minimum-wage-history/

Please note that the CBO and other economists note that raising minimum wage will wipe out some jobs. You may be willing to take that trade off but it is important to at least acknowledge that arbitrarily pricing labor above productivity does reduce jobs.

http://www.humanevents.com/2014/02/18/cbo-minimum-wage-increase-wil...

http://americanactionforum.org/research/how-minimum-wage-increased-...

Finally a number of people like to cite that labor productivity has increased so much minimum wages should have risen to mirror the rise in productivity. However if you look into BLS data (and I am sorry but I cannot find the chart right now) you would notice that labor productivity has shot up for manufacturing and service employees, as has wages, but retail and restaurant labor productivity has remained stagnant, so wages have done the same thing.

Minimum wage is a hotly contested point but just think about it my original point. Increasing costs lowers demand. Why does anyone think wages are different? Moreover as you have seen increased regulatory costs burden most businesses the total cost per hire has continued to pile on. When that happens companies move more towards automation and less towards manual labor, are you surprised that as the government has continued to grow and interfere in the labor markets you have seen a move towards greater automation and reduction in labor?

Comment by David Wells on May 27, 2014 at 5:15pm: Keith,

I just reread my answer and I realized the tone sounds kind of cranky. Sorry about that I did not edit before I posted and was already putting out fires this morning.

Comment by Sandra McCartt on May 27, 2014 at 10:29pm: Keith, if you want to ignore uneducated young women having kids they can't support with two or three baby daddies who contribute nothing or minimal support you are ignoring one of the root causes of poverty.

If we pay people more for not being able to do anything but show up half the time because they had no interest in anything but hanging out and making babies we haven't done one damn thing about the root cause of poverty..lack of education or training to do anything. If we pay more money for not being able to do anything it is simply an extension of welfare. There are too many people who have come from grinding poverty to a comfortable middle class because they worked like dogs to learn to something rather than protest.

Comment by Adam Krueger on May 28, 2014 at 9:51am: Just curious but why are you all talking about minimum wage? Mr. Petrone didn't mention 'minimum wage' once in his post and if my reading comprehension is as good as I think it is, his post wasn't really addressing the issue of minimum wage at all, but rather attempting to tackle the issue of turnover and worker productivity from a compensation stand-point. I agree that 'minimum wage' as a topic isn't very far away from this one, but I highly doubt that the author's intent was to start a discussion about minimum wage.

Comment by Keith D. Halperin on May 29, 2014 at 9:16pm: @ Sandra: I'm not going there, Sandra.

I will say that it's harder to move up here than it is in most advanced countries.

Also, what about the kids? There are a LOT of kids growing up in poverty.

@ Adam: by extension, we're talking about a "living wage" and how best to achieve that. I believe that increasing the minimum wage helps with that.

-kh