Can Raising Hourly Wages Improve the Bottom Line?
By: Elaine Pofeldt
Can an increased minimum wage help improve your company’s bottom line? The connection between compensation and productivity has been in the news of late.
The hourly wage trend first made headlines back in 2015 when McDonald’s raised hourly wages from $9 to around $10. More recently, the fast-food giant reported that team members were delivering better service and sales were rising. Similarly, Walmart found that after raising wages last year, sales have accelerated.
Obviously, these giant corporations have much deeper pockets than the average business that runs on a tight budget. Yet the possible benefits of increasing hourly wages have prompted some business owners to wonder if they could afford to increase their average salary. The question is increasingly pertinent in the highly-competitive 2016 small business hiring climate.
We checked in with a few experts on how you can assess your company’s capacity to increase wages and how it could possibly benefit your company’s bottom line.
Do the math. To determine if you can afford to raise pay and by how much, undertake a financial analysis, says Mclean, Va.-based business attorney Richard Trimber , who advises small to midsize clients on operational and growth matters as senior counsel in the corporate practice group at General Counsel, P.C.
“Broadly speaking, it’s a math equation,” says Trimber. The key, says Trimber, is to figure out if you can maintain your profit margin when you raise wages.
For simplicity, let’s say you make $100,000 in revenue a year and want to make a 10% net profit, or $10,000. To hit that $10,000 profit goal, you cannot spend more than $90,000 to bring in $100,000 in sales. Out of that $90,000 you will need to cover all of your costs, such as salaries, rent, utilities, interest expenses and taxes.
“You have to understand what all of those costs are,” says Trimber. “That will determine what you can afford to pay your labor and still make a 10% profit.”
If there is no money left over to pay higher wages, it may be because you are not charging customers enough to cover your overhead and are taking on some work at a loss. By taking on only the work you can do at a profit, you’ll have more money to pay your team competitive wages — —and improve the staying power of your business.
“You have to have the discipline to say you’re not going to do anything if it’s not profitable,” Trimber says.
Consider the costs of paying your employees too little. Paying employees too little to cover their living expenses may be adding to your overhead in ways you have not calculated. For instance, if an employee calls in “sick” because he can’t afford the gas to get to work for the rest of the week, your business will lose out.
“Scrimping on wages usually brings with it a number of hidden costs including higher absenteeism, excessive turnover and customer issues,” says Tom Armour, co-founder of High Return Selection, a Toronto-based company that develops and trains recruiters in North America.
When Armour’s clients are considering raising wages, he encourages them to look at several things:
- What is spent to replace employees who have left
- The cost of losing repeat customers who have become dissatisfied
- The cost of fixing mistakes by workers who were not motivated
“That is big money to a business,” says Armour. When that money is redirected into paying workers more, he says, “that money not only offsets better wages, but it often offsets them five, 10 or many times over.”
Add up the potential productivity gains. If raising workers’ pay will enable you to bring on talent capable of adding to your revenue or streamlining your costs, the salary increase may pay for itself. One such example is the Detroit-based JMJ Phillip Group.
About a year and a half ago, the executive search firm, which focuses on manufacturing and the supply chain, did some analysis on worker salaries, about 15% of whom are hourly workers, says Dennis Theodorou, vice president of operations.
The results prompted the firm to raise hourly worker pay by about 25%, he says. “Right now, it’s warranted,” says Theodorou. “The market is extremely competitive.”
At the same time that it bumped up worker pay, JMJ Phillip Group also raised its expectations about their employees expectations. When the company increased wages for existing employees, for instance, it often provides coaching and employee training.
The goal was to empower employees to make a stronger contribution to the company by improving its customer service and internal processes, says Theodorou. In hiring 10 to 15 people in the last year, the company also developed a multi-step process that provides added insight to a candidate’s character.
“We have definitely taken measures to avoid ‘settling’ in hiring,” says Theodorou. “We’ve been able to pay some extra money for those who are going to come in, really perform and be able to generate a little bit more revenue that will help us sustain the increased wage — and then some.”
As Theodorou has realized, raising workers’ pay can often do more for your bottom line than keeping wages flat.