HR must argue for strategic salary hikes
People Matters|January 2021
Companies often confuse pay reductions with cost reduction. But contrary to popular opinion, pay reductions are more likely to drive costs up or profits down instead. There are other, better ways of achieving the same objective
Jeffrey Pfeffer & M Muneer

Enterprises, and even governments, often seek to hold down the pay of employees in an effort to reduce costs. This effort to reduce costs by cutting pay long predates pandemic “lockdownomics” and won’t disappear when the pandemic ends.

Post 9/11, when the airline industry experienced a large decline in demand for travel, almost all US airlines except for Southwest not only had layoffs, but obtained large wage concessions from their workers. When US-based automakers struggled to turn a profit, they negotiated two-tier wage structures where new employees would make less money. The recession of 2008 accelerated this trend. According to the NYT, pay cuts, sometimes the result of downgrades in rank or shortened workweeks, are occurring more frequently than at any time since the Great Depression. Pay for the average worker remains constrained today, possibly one explanation for the worldwide ongoing financial stress and political turbulence.

But contrary to what many leaders, analysts and HR professionals seem to believe, employees’ rate of pay is not synonymous with labor costs (which reflect not just the rate of pay but also productivity). Moreover, labor costs have little bearing on competitiveness or profitability. Many companies in the IT industry pay very well, but, because of their business models, are extremely profitable. But lower wages do lead to ill health and financial stress, indicators of diminished well-being.

Evidence suggests that if companies paid more, not only would they help their employees but also they would actually help themselves. Here’s the logic.

Higher pay for higher productivity

In 1914, Henry Ford introduced a $5 per day wage at the Ford Motor Company, more than doubling the prior rate of pay. According to Robert Lacey’s book, Ford: The Men and the Machine, the move aroused the ire of The Wall Street Journal, which accused Ford of “economic blunders if not crimes.” The result of the higher pay: diminished turnover, higher quality workers and higher productivity and profits.

About 100 years later, Dan Price, CEO of Gravity Payments, generated mammoth publicity— and skepticism from Fox Business—when he announced a $70,000 annual minimum wage for Gravity’s employees. The much-talked-about move drove customer leads through the roof, and Gravity, a relatively small company of about 200 employees, received thousands of employment inquiries. Profits have never been higher.

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