The False Economy of Paying Low Wages

Money, money, money

Money, money, money

Does it make good sense to pay your employees as little as possible?

Lots of small firms (and big corporations) would answer that quickly with a resounding “YES”. They would tell you that labor costs are a big part of their overall costs, and the more they can reduce labor costs, the better.

But, if that’s the case, then why are huge companies like Wal-Mart, Target and IKEA substantially raising the hourly wages of their employees? Not because they have to because the minimum wage has been raised is a city where they have a store (those don’t take effect for quite a while, anyway), but because they say it’s the right thing to do, and they’re raising hourly wages on a nationwide basis. Why are they doing this?

I mean, you think your labor costs are high? Wal-Mart has a lot of employees, wouldn’t you think?

And none of these large companies got to be the size that they are today by doing stupid things on a consistent basis, so that begs the question: “Why are they increasing the pay of their employees across the board? Where is the benefit to a company like Wal-Mart in sustaining that sort of large (and permanent) increase to their labor costs? What do they know that, say, the owner of a local Popeye’s Chicken franchise doesn’t know?”

Well, I won’t keep you in suspense any longer. What they know is something that they’ve all sort of just figured out at once, and that is, that paying their employees minimum wage (or close to it) is false economy. That is, the money they spend every week on paychecks is as low as it can be, but they’re losing in other areas. It’s the false economy of paying low wages.

And, the only reason they were able to figure this out is because the technology available these days to collect and parse data is so sophisticated, so accurate, that they were able to peer inside the gigantic machine that is their companies’, and other companies’, operations and revenues.

What they found out, among many other things, was:

If you pay employees a decent wage, they’re happier, and customers sense this, and this makes the customers happier as well

Happier employees are more helpful to customers and average sales rise in the store as a result

Paying employees more mean lower turnover, which means much lower hiring and training costs, and, means the employees are more knowledgeable about the business and the products of the business

Paying people more results in less sick days

Employees that are paid more are generally more loyal to the company, and are much more likely to “go the extra mile” for the company in times of need (i.e. clean-up after a natural disaster, or taking another shift if someone doesn’t show up for work)

By paying their employees more money, these companies have found that they’re saving even more money, AND, making more money from increased sales. Wow!

Seems like everyone wins in this scenario.

BTW, here’s a list of some (not all) of the largest, well-known companies that are now following this strategy:

Ben and Jerrys

Whole Foods




T.J. Max

Shake Shack






The best part about reading this post is that you now know what they know, and can apply the same strategy to your up-and-coming business, should you decide this approach might work for you.


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