Overpay the Underqualified

Paying above market wages

Henry Ford did it.  In 1914, he paid his employees $5/day, when the prevailing wage was $0.25/hour.  (That’s more than double the going rate, for my readers who didn’t tote their calculator this morning.)  Among other things, it allowed his employees to afford his automobiles.

Costco‘s paying roughly 40% more than its competition today.  They believe it’s the right thing to do.

If you provide a living wage and affordable, quality health care, you’ll get the best employees, which in the long term makes business sense as well.

Few of my clients are the size of Costco, and readers can’t afford to offer employer-paid health care.  More than a few, however, have learned that shaving nickels off the payroll winds up costing more in the long run.  (We’ll talk about voluntary workplace benefits in another post.)

Overpay the under-qualified

The presumption in this exercise is that you have found someone who can do a good-enough job, and you’d rather keep that person than to have to search through that particular labor pool again in the near future.

We’ll use the federal minimum wage to make it straightforward.  Higher wages only tip the equation more in favor of higher wages…

$7.25/hour = $15,080 on a full working year.

$8.25/hour = $17,160

The difference is $2080.

Allowing the cost of replacing a worker is 30% of a year’s wages (which is the low end of the estimates), replacing a minimum wage worker can cost $4524.

Keeping that worker happy by paying $1.00 more per hour could save $2444.  (I’ll admit–I’m stretching this a bit.  You’ll make back just a little of this money by NOT paying the absent worker, but you also won’t get her work done or will have to do it yourself.  You also have to pay a bit more in employer-paid taxes on the higher wage.)

Of course, you can extend this to the point of ridiculousness, but you can find a balance point.

Underpay the over-qualified

Employers who have ready access to a highly competent labor pool sometimes work the reverse method:  hiring overqualified people to work in fairly simple and straightforward jobs.  These employers use the argument that they get so much MORE work out of the overqualified that they make up what they lose in turnover costs. You’ll see this happening in university towns, especially if the employer can offer flexible work arrangements.

You get to decide.  If the process of recruiting and interviewing is something you really dislike, make sure you do everything you can to keep your good workers happy.  Paying above-market wages may be less expensive than you thought.