When Wages Drive Profits: The ONLY Way Employees Pay You Back

When someone says “Our People Make the Difference”… I always roll my eyes.  We all hire from the same talent pool.  No employer really has an advantage … and no large group of people can be that amazingly different from any other large group of people.

Or so I thought…Until I read some amazing research that has convinced me that there is one way that employees can actually drive real differentiation and profits.

The study compares two well-known and very similar retailers in the USA:  Costco and Sam’s Club.

The first, Sam’s Club, pays their employees an average of just over $11 per hour and about 21% of their employees quit each year for various reasons.

Costco, however, pays their employees $16 per hour and replaces just 6% of employees each year.

Said another way, Sams Club pays less for salary, but 350% more for recruiting, hiring and training expenses than Costco.

Even more impressive are the differences in sales at the two companies.  At Costco, where higher-paid employees stick around longer (and thus are probably better trained, happier, and more knowledgeable about the store), sales are $795 per square foot.

At Sams Club?  You guessed it — just $516.

That is 50% MORE SALES PER SQUARE FOOT AT COSTCO!

THE BOTTOM LINE: Happy, motivated employees will create a happy, profitable company.

But I think it’s even deeper than that…  If you are cynical and view people as a cost (a place to make budget cuts), then you’ll end up hiring the lowest-cost employees.  Instead, look at people as an investment.  Hire the best you can possibly afford.  Motivate and encourage them.  Train them.  Stretch to your limit to keep them excited to come to work…. then watch as they actually perform!

If a 50% increase in salaries can result in a 50% increase in sales… are you better off?

That’s a math problem, to be sure (more on that in a second), but maybe it is also a human problem.  The study did not discuss this, but I’m willing to wager that paying higher wages is not the only thing that keeps Costco employees happy at their job.  There are probably differences in benefits, training and management attitudes toward people too.  Starbucks does not pay exceedingly well, but their employee loyalty is legendary thanks to healthcare benefits, flexible scheduling options and a culture of caring.

OK, let’s do some math.

If you want to experiment in your business — you could try to improve the culture and work conditions.  Or you could increase wages.  There’s a limit to how much you can increase worker’s pay, of course.  If you think better employees will help you sell more, then the formula is like this:

(increase in total sales $) x (gross margin %) / (all hours worked) > (increase in hourly wage $)

This is simply how you say “how much extra gross profit will better workers make each hour?”

You can’t give away all the excess, so the raise they get must be smaller than that hourly lift in gross profit.  (Note:  Why can’t you give it all back to them?  For one thing, some expenses may rise along with sales, like the cost to order and carry extra inventory.)

So let me know — would you rather invest in culture, benefits or just pass along the cash to employees as higher wages?  If you were the employee, which would make you happier?

Remember, the goal is to keep employees happier longer.  Each time an employee quits, you lose.  You lose a little piece of knowledge, but you also lose the time and money you’ve invested in recruiting, interviewing, hiring and training.

The stakes are higher than you might think.  How will you win the game?  Leave me your thoughts below.  I’d love to hear them.

Dedicated to your (Employee-Powered) profits,
David