Want to Boost Corporate Profits? Pay Employees More
Life + Money

Want to Boost Corporate Profits? Pay Employees More


Last month, an image featuring former Costco CEO Jim Sinegal touting Costco’s generous wages for employees went viral.

In case you didn’t see the meme, it said, “Costco CEO pays his employees $17/hr on average, plus benefits, earns less than $500K, refuses Wall Street demands to cut employee salaries and benefits.”

What the image neglected to say is that he’s no longer the CEO.

No matter. Since it’s not every day that a company’s former CEO makes news, we took a closer look at the 2005 New York Times profile that inspired the meme, discovering some amazing facts in the process about how Costco put employees first–while still managing to become a leading player in the industry.

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A number of studies–as well as the success of companies with similar attitudes as Costco–have revealed a surprising truth: Happy employees create huge profit margins.

Yes, the key ingredient is happiness—not intelligence, hours worked or years of experience.

We’ll take a look at how treating employees right benefits companies both immediately and in the long run, as well as how the innovative methods used by employers can help keep their workers happy.

How ‘Pay More Money, Make More Money’ Works
Broadly speaking, keeping employees content helps them to stay engaged and productive at the office, which in turn helps make companies more profitable. Dr. Noelle Nelson, a clinical psychologist and the author of “Make More Money by Making Your Employees Happy,” told Forbes: “When employees feel that the company takes their interest to heart, then the employees will take company interests to heart.”

But how exactly does treating employees well improve profits?

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There are a few proven methods: Providing better benefits, promoting from within, offering employee training and compensating generously. While these methods have a variety of results, all of them work to prevent employee turnover, which results in a loss of productivity due to the time spent hiring and training new employees–not to mention that turnover is expensive, thanks to the recruiting costs associated with filling open positions.

Let’s take a closer look at the factors that can impact a company’s bottom line:

1. Offering Better Overall Benefits
The 2012 Aflac WorkForce Report showed a clear correlation between satisfaction with benefits packages and overall satisfaction: 73 percent of workers who are very or extremely satisfied with their benefits profess an equal level of satisfaction with their jobs.

So how exactly do good benefits lead to higher profits?

  • Less turnover. Employees who are very or extremely satisfied with their benefits are six times more likely to stay with their employers than workers who are dissatisfied, and 49% of workers surveyed by Aflac said that improving benefits would convince them to stay at their current jobs.
  • Less absenteeism. Good health care and wellness benefits improve employee health, which in turn improves productivity and cuts back on productivity losses associated with absenteeism. On average, productivity losses related to personal and family health problems cost employers $1,685 per employee annually.
  • Attract better talent. Better benefits packages make employers more attractive to prospective employees–which means a more talented workforce.
    Starbucks, one of Fortune’s “100 Best Companies to Work For,” had a net revenue of $11.7 billion in fiscal year 2011. Its 95,000 part-time employees get full health insurance benefits, stock awards and free coffee. We’re sure it’s not just the caffeine that keeps those baristas revved up to go to work!

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2. Promoting From Within
This keeps employees happy because it makes workers feel that hard work will be rewarded, and that there’s room for growth at the company, which cuts down on turnover.

Costco started promoting from within for 98 percent of open positions, and after the first year of employment for line workers, turnover fell to less than 6 percent.

Additionally, external hires are more expensive and less successful, on average, than employees promoted from within. Employees hired externally made 18% more than those who were promoted internally to the same position, and they were 61 percent more likely to be fired.

3. Providing Successful Training
A study conducted at the University of Guelph in Ontario, Canada, found that structured training and orientation for new employees made workers feel more confident and satisfied with their new positions.

The Container Store, for instance, places a huge premium on employer training: Each branch has its own full-time trainer, and new employees receive more than 241 hours of training within the first year, compared to the industry average of seven hours. As a result, the turnover rate at the Container Store is just 15-20 percent in an industry where 100 percent turnover year to year isn’t surprising. Additionally, 41 percent of new hires come from current employees, which also speaks to worker satisfaction.

4. Offering Generous Compensation and Financial Incentives
Profit-sharing opportunities, stock options and generous compensation packages increase employee satisfaction and loyalty. Along this line of thinking, a study from McGill University found that concentrating on the workers at the bottom rung pays off in profits for the company as a whole.

For example, Costco pays workers 42 percent more than competitor Sam’s Club. While this means higher overhead costs, the increased wages pay for themselves in terms of higher productivity and lower turnover. Additionally, higher wages attract better talent. The Container Store pays its full-time clerks $44,000 a year, and its wages are 50-100 percent higher than the retail industry average. As a result, the company had 1,500 applications for 60 positions when it opened a store in Edina, Minnesota.

When American Apparel provided a financial incentive to each worker to sew more garments, the company was able to triple its productivity. Providing stock options to employees has also been shown to increase productivity, due to a heightened sense of ownership and responsibility. (And being able to work from home makes us healthier and happier.)

Lastly, being known as a fair and generous employer increases a company’s value in the eyes of local communities. Because of its generous wage structure and opportunities for internal promotion, Costco faces less community opposition than its competitors when looking for new locations for stores and warehouses.

Treating Employees Well Really Does Pay Off
These reports and case studies show that putting employees first benefits both workers and companies as a whole.

As Jason Fried, the CEO of 37 signals, told Fast Company: “Lots of [companies] burn people out with 60, 70, 80 hours of work per week. They know that both the people or the company will flame out or be bought or whatever, and they don’t care, they just burn their resources. It’s like drilling for as much oil as you possibly can. You can look at people the same way.”

The takeaway?

Even though it’s counterintuitive, paying employees more can actually lower costs.

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