Can Boosting Pay Actually Increase Your Profits? Yes!
For centuries, employee salaries have been categorized as an expense. Classic Capitalist theory tells us that, to maximize profits, a company must reduce its employee roster to the bare minimum and to pay each worker as little as possible.
But the Age of COVID is turning this age-old dictum on its ear. Today, many employers are finding it nearly impossible to hire cheap labor and are suffering as a result. No doubt you have recently visited a restaurant, hotel, or retail store that was seriously understaffed and could not provide the level of service it did just a year ago. Although less visible, businesses of all types report suffering from similar worker shortages.
At the same time, companies that are increasing their wages are discovering that business—and profits—are booming. How on Earth can this be? As it turns out, the mystery at play here is not so difficult to solve.
Our current “worker shortage” may be traced to four principal causes:
Because of waning COVID-19 vaccine efficacy and the prevalence of the delta variant, many people are reluctant to take on jobs that require them to be in close physical contact with other people.
Due to COVID, many parents are either unable or unwilling to send their young children back to school or to daycare, thus must stay at home to tend to their needs. And, childcare is not as available as it was pre-COVID.
Some low-paid workers have found they prefer to collect unemployment rather than to return to the workforce. (Although most COVID-related benefits are due to expire in September.)
Many workers have used the recent “pause” in the economy to reevaluate their situations and now simply refuse to return to jobs or labor for wages they find unsatisfactory. This has led to a movement some have called “The Great Resignation.”
Certainly, with labor now at a premium, many companies are finding they must increase their pay scales to attract applicants. And it’s working.
Over the past few months, my company, Conover Consulting, has been extremely busy assisting our clients with modeling the cost of raising their pay floors. Some companies in California are looking at increasing theirs to $18 per hour, others are seriously considering an even heftier $20 minimum. Not surprisingly, those organizations that offer higher wages are finding that qualified candidates remain plentiful—which may be one reason why the national unemployment rate continues to drop.
Still, this begs the question: shouldn’t these higher wages decrease profitability? After all, that’s what we all learned in Econ 101. Right? As it turns out, reality tells us a different story. Higher wages attract better applicants—people with the talent, skills, knowledge, and experience that can boost productivity and innovation. Also, when people are paid and treated well, they tend to stay at their jobs longer. Accordingly, this means companies can avoid the costs, headaches, and inefficiencies associated with constantly having to recruit, vet, hire, and train replacement workers.
In other words, Skills + Stability = Greater Profits.
If you are thinking of raising your company’s pay floor, it’s important to remember that when doing so, pay equity issues still need to remain a focus. (Simply raising the floor without comparing pay differences within same or similar jobs and ensuring those differences do not look like they are driven by race, gender, or ethnicity, especially in states like California with pay equity laws, is critical.)
What’s more, it’s also crucial to review the compensation earned by each person within each salary grade (this assumes, current, appropriately constructed ranges are in place) to ensure they are paid sufficiently and in their appropriate range. Prior to 2021, compensation professionals used to think in terms of hiring people who meet minimum qualifications for a job near the bottom of the range for the job. Now we are advising clients to pay at least at 90 percent of the range to start, and higher for hot skills jobs.
Even so, please remember, ample compensation cannot make up for negative company cultures or toxic leaders. To acquire and retain great people in the current war for talent, pay must be competitive and culture must be solid. Striking just the right balance between discerning those wages that makes a job attractive and those that contribute to your company’s profitability is a skill that has taken me three decades to hone. In fact, Forbes took notice and recently interviewed me to learn my insights on the war for human talent, even in our unprecedented technological age.
To learn how you can attract the people you need to make your business boom in our new normal, please contact me at laura@conoverconsulting.com.