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5 Reasons Why You Should Raise Employee Wages

Disclaimer: One of the following statements isn’t true. Can you figure out which one?

  • Productivity is lacking today in American business.
  • Employees are not engaged.
  • Wages are stagnating.

Read on to find out which one of these statements is false.

Sluggish recovery from the Great Recession is nearly complete. The US economy continues adding jobs, with a 2017 net average of 176,000 new jobs per month. That’s why GDP is good, with second-quarter growth of 3 percent. Yet wages are poor, rising at a rate of 2.5 percent, which is the same as 2016. “Wage growth is anchored to inflation and productivity. The subdued rise in earnings is therefore to be expected against the current backdrop of weak productivity growth and low inflation,” says JLL’s Chief Economist, Ryan Severino.

Wait a minute, that doesn’t make any sense. The untrue statement at the beginning of this article is, “Productivity is lacking”. Mr. Severino is wrong to pinpoint “weak productivity growth” as one of the reasons for poor wage growth.

5 Reasons Why You Should Raise Employee Wages

In fact, productivity went up 1.5 percent in Q2 of 2017. That’s a result of flat-out surge in output, at 4 percent, while the average number of hours people worked remained the same. Bloomberg points out productivity is rising without more workers coming on board. Plenty of businesses are doing more with a full roster, without an increase in the number of hours employees are working. You can chalk a great deal of that up to improvement in employee productivity.

International Monetary Fund notes the disparity between unemployment and wages. This is happening all over the world in developed economies. Unemployment rates are low. Even though there’s a lower supply of workers to fill positions—therefore a higher demand for workers—wages are not rising like the law of supply and demand says they should.

So we’re stuck, right? Wrong. You can choose to pay employees more. Here’s why you should:

#1. No One Else Is Doing It (Who Do You Want to Be?)

People tend to eschew overt individualism in favor of conformity and groupthink. It’s easier and safer to do what the majority of people are doing. Yet isn’t taking measured risks a part of advancing in business?

Raising wages is a risk, but not a big one. Raising wages shows you believe in your employees’ abilities and the quality of their work. In turn, this vote of trust can translate into better company performance. Of the top performing companies in a survey by PayScale, 90 percent gave their employees raises in 2015, and 94 percent planned to do so in 2016; 86 percent of the top performing companies claimed that “their people are their greatest asset.”

These top performing companies were the minority in Payscale’s survey, making up 30 percent of the respondents, and were more committed to giving employees raises than average performers. But Forbes’ Karsten Strauss points out that the figures “bring up a chicken and egg question: can the success of top performing companies be attributed to the way they treat their workers or do they simply have more money to pay them because of their success?”

Strauss reconciles this causality versus correlation problem by pointing to the philosophy of top performers. While 86 percent of the best companies feel people are their greatest asset, 78 percent of average performing companies share this value. A commitment to people and pay raises might not be the only thing that boosts top performing companies, but this commitment is certainly a big part of the mix.

#2. You Could Increase Retention and Profits (Smart Risks Equal Good Results)

In 2015, CEO Dan Price decided to pay everyone at Seattle-based credit card processing company Gravity Payments a minimum of $70,000. That year, turnover rate was the lowest it’s ever been:

And profits went up from $3.5 million in 2014 to $6.5 million in 2015. Because of the lower turnover rate, Price doesn’t have to fork out money to hire and train new employees. Megan Driscoll, CEO of PharmaLogics Recruiting, heard about Price’s move and made a similar one with her company. Revenue increased from $6.7 to $15 million, and profit margins have remained the same.

#3. You Can Set Higher Standards (Productivity Will Increase)

More top performing companies are committed to giving raises than average performing companies. Megan Driscoll and Dan Price demonstrated raising wages can increase revenue and profits. If these examples hold, it follows that when you’re paying employees more, you can expect better performance and more productivity, which contribute to revenue and profits.

People achieve more when you set the standards higher. Consumer electronics store Best Buy found that “individual productivity” improves by 35 percent when management holds employees accountable for outcomes. “The leader raises the bar of performance expectations by setting elevated goals and creating methods of measuring the progress toward those goals, says Forbes’ Jack Zenger. So, management must hold employees accountable for increased productivity as pay increases.

#4. Unemployment Rate Is Dropping (You Need to Attract Good Candidates)

It’s only a matter of time before a low unemployment rate will cause one of your competitors to raise their wages. In turn, they’ll attract the most highly qualified candidates. “If you don’t pay employees fairly, they will leave—and no perk will change their mind,” says Dan Schawbel, research director at Future Workplace.

A study from Future Workplace and Kronos found 87 percent of employers are worrying about employee retention because the unemployment rate is low (according to the Bureau of Labor Statistics, in September of 2017 it was 4.2 percent). The same study found employers planning on raising salaries by 3 percent. According to Schawbel, respondents to a poll from 60 Minutes and Vanity Fair said that “the best way to keep an employee motivated is money, and 35% of respondents said [good compensation] was the most important thing they look for in a new job.” Meanwhile, a study by Glassdoor found more than half of employees are confident they can find a new job in six months.

There’s only so much loyalty HR efforts can create. The price of living keeps going up. Your best employees are likely to go somewhere else if you don’t increase their pay. Don’t wait for a competitor to beat you to it.

#5. Corporations Have Tax Loopholes (You Can Afford It)

One commonly invoked reason for the need to raise wages is the CEO to employee pay. In the US, CEOs earn 335 times more than employees. But as Harvard Business Review’s Alex Edmans points out, that’s because CEOs are operating in a different stratosphere. Their decisions affect the whole company and can add billions of dollars in value, while a single worker’s decisions add much less.

Edmans argues corporations should pay everyone more instead of docking CEO pay. He points to research on corporate stock prices in the long run. Over the long term, corporations with more satisfied employees also see a two to three percent increase in stock price yearly. That means they’re beating their competitors.

But where would the money come from to increase everyone’s wages? Corporations use tax havens to avoid paying $30 to $90 billion a year in federal taxes, and about $20 billion in state taxes. Even if some of this money goes to pay shareholders, wouldn’t it be better to use it to increase employee pay? This would make corporate stocks more successful in the long run, meaning shareholders would still win. And aren’t long-term shareholders what a company wants? Over the long term, an annual stock increase of three percent equals huge dividends for shareholders.

It’s About Competing

Increasing employee pay is imperative in an economy where competition is extremely fierce. But this isn’t to say better pay alone equals better results. Management must also hold people accountable, while HR implements other retention strategies, such as team building activities, and executives foster a culture of open communication, transparency, and respect. Employees must know they have mobility. They can earn rewards for good work. In return, they’ll help your organization perform at its peak.

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Daniel Matthews is a freelance writer from Boise, Idaho specializing in social media and tech. You can find him on Twitter @danielmatthews0 and Facebook.

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