Why Paying Employees More Is A Great Way To Save Money

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.