Plenty of studies indicate that employee pay is important… but not that important.
As Gallup CEO Jim Clifton says, referring to the company’s ongoing State of the American Workplace study:
The single biggest decision you make in your job — bigger than all the rest — is who you name manager. When you name the wrong person manager, nothing fixes that bad decision.
Not compensation, not benefits — nothing.
In many cases that’s likely true. If I make $40,000 a year, really don’t like my boss, and another company offers me $42,000… yep: I’ll probably leave.
The same is true if I don’t like the nature of the work I do, or if I feel there are few opportunities for advancement. In that case, even a small increase in salary may be enough to lure me away. (That’s one of the primary causes of the Great Resignation; when employment options abound, incremental improvements in pay or working conditions are fairly easy to find.)
But what happens when the pay differential is sizable rather than incremental?
That’s what Henry Ford decided to find out when he faced his own version of the Great Resignation.
In 1912, Ford had doubled production by doubling the company’s labor force. In 1913, with his moving assembly line systems fully in place, the same number of employees produced twice as many cars. The 12.5 hours it had taken to build a car was now just 93 minutes.
Problem was, transforming productivity also transformed the nature of a line employee’s job. Automation and optimization quickly turned individual craft into mind-numbing repetition. Workers did one thing — one physically demanding thing — over and over and over.
And soon were quitting en masse: Ford’s annual turnover rate hit 370 percent. (Imagine cycling through three employees for every job over the course of a year.)
So Ford took a radical step. Instead of raising the pay rate by 10 or even 20 percent, he doubled the basic rate from $2.50 a day to $5 a day — while also reducing the standard workday from 9 to 8 hours. (While working less hours for more money was great for employees, it also allowed Ford to turn what had been a two-shift operation into a three-shift operation to dramatically increase capacity, a genuine win-win for employer and employees.)
What happened? Within a year labor turnover fell from 370 to 16 percent. Throughput increased by over 40 percent. The addition of a third shift — whose jobs were easy to fill since prospective employees flocked to Michigan in hopes of landing high-paying work — dramatically increased overall production.
Even though Ford’s shop floor employee wage costs had doubled, the cost savings from enormous improvements in productivity and employee retention were at least in part passed on to customers: By 1919, a Model T car that had sold for $800 in 1910 only cost $350.
The combination of higher wages and lower prices made owning a car possible for thousands of employees, and for the first time, the average Ford employee could also be a customer.
To paraphrase Ford, “We believe in making 20,000 employees prosperous and contented rather than just making a few of our executives millionaires.” (On the flip side, there were strings attached: Employees had to workers had to abstain from alcohol, not physically abuse their families, not take in boarders, keep their homes clean, and contribute regularly to a savings account. So yeah: Henry Ford’s “largesse” definitely came with conditions.)
The result? Lower prices broadened the company’s customer base, making Ford’s low-margin, high-volume strategy even more effective.
Obviously increasing employee wages overnight isn’t that simple. Without the cost savings afforded by assembly line efficiency, doubling wages would have been financially impossible for Ford.
Which is the point: While profits clearly matter, what you do with those profits can matter even more.
Maybe you’ll decide all of your employees can work remotely, and use office and infrastructure savings to increase wages. Maybe you’ll work hard to automate repetitive processes, pass those savings on to customers in order to broaden your customer base, and achieve efficiencies of scale that generate greater profits that can be used to pay your employees more.
In time, higher pay may lead to better retention rates. To attracting even more talented employees. To greater productivity, efficiency, and cost control. (That’s certainly what Microsoft hopes; the company just announced a substantial boost to employee compensation.)
Most business owners plan to someday pay their employees more when their business is finally thriving.
But maybe a way to build a thriving business is to focus on finding ways to pay your employees more today.