The major big-box retailer, Costco, opened its first store in 1983. Offering economic prices, supersized packaging, and high-end food samples. Costco quickly became a hit in America growing stores throughout the United States like wildfire.
Many don’t know that Costco’s ownership has always focused on being one of the most ethical companies. Their main narrative the public hears about is how they treat their employees. Most notable of those factors, employee compensation.
From an early age of inception, Costco has believed that higher pay reduces employees’ turnover, increases loyalty, and improves efficiency. Their biggest competitor is Walmart and Sam’s Club. Costco typically pays 50% more than their competitors and their attrition is 27% less than Walmart.
Most companies pay the minimum necessary to bring in talent. This holds true working on Wall Street as it does at a 7-11 quick stop. Managers, trained and berated to keep costs down. Salary tends to be the highest contributor to costs.
Organizations routinely perform compensation surveys to know average salaries for kindred positions. Then a company will shoot for the middle. If they are average, they are neither a fool for paying too much or cheap for paying too little. Yet, you get what you pay for.
Paying to the average enlists an Army of future dissatisfied employees. They will be willing to jump at the first pay raise opportunity. It is not the money that is the dissatisfier, it’s the feeling of not being considered special and worth more.
There are numerous reasons for attrition. While salary isn’t the most cited reason, it always plays a factor. For those employees that land on the bottom end of salary, small increments make a huge overall impact to their well being. This is where an extra $1 to $5 per hour makes a significant difference. To the corporate costs, these are rounding errors however, constant employee churn results in gigantic hidden costs.
Numerous studies into employee attrition and salary have come out of academic research. Corporations completed similar research finding in a joint study by Chobani and Wayfair that a $1 increase in salary reduced quit rates by 19%. The increase in salary keeps operation costs down by paying more up front.
Efficiency wage theory states that wages above market level pay for themselves through higher motivation and retention. Prime example being Costco as previously mentioned. Making steps like this also raises store social capital with their customer base.
Organization’s wanting to work effectively cannot have constant battles on salary. Salary, a cost that cannot find optimization. Salary is a tangible number; however, it represents a non quantifiable impact to employee well-being and respect.
For example, take the impact that Covid-19 had on remote work. Numerous employers let their employees move to different locations, many leaving the ultra-highly expensive Bay Area. Some of those same employers moved forward by then cutting salaries to match the new zip code of the remote employee. As an employer you’re paying for the value they provide, not from where it is provided. Moves like this equates to paying married men more in the 1950’s because they must support a family.
All employees want to feel valued. As an organization aim for the higher end. You will want to pay people enough where they don’t worry about it.
What is immediately rewarded is repeated. People actively avoid all punishments. This is human behavior 101.
Bonuses and cash payments work the same way. The standard model is that at the end of the year employees’ goals and the organization’s goals are evaluated if they were achieved or not. If they were an end of year bonus is awarded. It also coincides with releasing funds right before the end of the year to alleviate the tax burden.
End of year bonuses however eventually just become an expectation. Both the organization and the employee would benefit from immediate reward. By not waiting until the end of the year, the employee knows what gets them rewarded. The bonus can then be used as an effective lever. From the organizational standpoint, simple estimation of budget will enable bonus payments throughout the year.
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