If management believes that people are its most important asset, why is payroll considered a cost center rather than an investment? Labor costs are one of the largest line items on the income statement is. Managers often look first to control costs and increase profits. But the instinct to keep labor costs as low as possible can be destructive.
Too many employers view employee compensation for low- and moderate-wage earners as an expense with little or no return. They recognize the short-term costs, but not necessarily the long-term value. They're missing something pretty basic: investing in paying low-wage workers more can actually increase measurable business value.
Rebuild a company in trouble
In 2014, I was appointed CEO of CareCentrix, a troubled healthcare services company. The company faced declining margins, increased sales, and stagnant revenue growth. Our investors wanted a change. For many companies, it can lead to cost savings and employee headcount management. I decided to try a different playbook. After experiencing lightning-fast growth, CareCentrix lost sight of what made it successful in the first place: its people.
Like many companies, our entry-level employees started at the federal minimum wage. The hourly wage then and now is $7.25. According to our recruitment team, this is the industry standard and we've had a steady stream of people applying to start their careers with us.
Despite this, I was bothered by the unusually high turnover rate. In some regions, nearly 50% of employees left within a year. However, the more time we spend with our employees, the more we see problems with our compensation approach. Many of the employees were struggling to survive. We had a customer service representative who was living in his car and another who was struggling to buy diapers for her daughter. I shouldn't have been surprised. There is no county in the United States where a person can live on $15,000 a year.
I ended up coming up with an unconventional approach. What if we froze wages for the first team and invested the money saved in raising wages for entry-level employees? He proposed more than doubling his $15 an hour wage.
After talking to my management team (though it took some convincing) they agreed to a pay freeze. We significantly increased pay for nearly a third of our employees. The results were immediate. Sales decreased and productivity increased. Our investment in our people paid off and directly translated into greater business success. CareCentrix returned to growth, more than tripling in size and quadrupling in value before selling the company to Walgreens in 2022.
low wage problem
My experience with CareCentrix was no fluke. While low wages may seem like a shortcut to profits, there is ample evidence that they actually limit a company's long-term success.
Poverty prevents workers from performing at their best.
Poverty is mentally and physically exhausting. If an employee's income is too low to pay rent and they are sleeping in their car, their work will naturally be affected. If your employees have to worry about paying their bills every month, it's unlikely that they won't feel overly distracted or stressed at work.
In America today, about 40 percent of workers earn less than the basic cost of living. This means that nearly half of all workers in the United States are facing some form of financial stress in their personal lives, which is impacting their professional lives. Research shows more than half of workers have three or more expenses working hours Each week we will address or reflect on an issue related to personal finance.
Sales are expensive.
Replacing employees, even low-level employees, costs a lot of money. Most estimates put the cost of replacing an employee at between 30 and 200 percent of the employee's annual salary. For an average company with 100 employees, turnover costs can reach up to $2.6 million per year. It's expensive and avoidable.
Compensation is the number one reason employees leave their jobs, with 55% of resignations being due to a desire for higher pay. in harvard business review According to the survey, 62 percent of low-wage workers said they would be more likely to stay with their current employer if they received a raise or promotion.
This is especially true for low-wage workers. They are the workers most likely to quit, making business models that rely on minimum wage labor inherently unstable. Workers earning $7.25 an hour were more than 70 percent likely to leave their jobs within a year. At $20 an hour, that number is cut in half.
Losing employees reduces productivity.
The exact amount of time varies by industry and position, but it typically takes a significant amount of time for employees to reach peak productivity, sometimes spanning months or even years. Companies with the highest turnover rates have the greatest challenges. For example, in a fast food restaurant, it takes about four months for employees to reach expected productivity levels. Although this is significantly lower than the average for most other jobs, more than 50% of fast food employees quit before reaching 3 months of service. This means that at a typical fast food restaurant, more than half of the employees are likely working below peak productivity. .
solution
For companies struggling with productivity and high turnover, the solution to the problem is obvious. It's about paying low-wage employees more.
The evidence shows it's an investment that pays well. A 2019 study by the London School of Economics found that employee satisfaction is directly correlated not only with employee productivity, but also with company profitability and customer loyalty. did. This relationship also extends to stock prices. Companies ranked by employees as one of America's 100 Best Companies to Work For from 1984 to 2011 consistently outperform their competitors in the stock market, with an average annual growth rate of 2.3 to 3.8 percent. It was expensive. It's not on the list.
This tracks my experience as CEO of Carecentrix and what a growing number of executives are realizing. Raising the wages of low-wage workers is not a waste of money, but one of the best investments a company can make.
