Does Paying More Get You Better Talent?

As politicians talk about raising the minimum wage, free agent football players are getting new contracts, and there being some focus on retailers who pay a significantly higher wage than their competitors, it’s as good of a time as any to talk about the relationship between pay and performance.

At the high end, companies clearly think that there is a relationship between pay and performance.  The players with the best statistics (regardless of sport) generally get the biggest contracts.  When asked why their executives get paid so much, companies will frequently respond that they need to pay to attract and retain top talent.  Oh, and having friends on the board of directors’ compensation committee doesn’t hurt.  The thinking here is that people who make a lot of money will switch companies/teams for even more money, so paying more will retain top talent.  Unfortunately for these companies, higher CEO pay tends to lead to lower company performance.

As it turns out, in sports management really ends up paying for past performance rather than future performance.  That’s OK if you are a team resigning a player.  Not so good if you’re a team that signed a player away from another team.

For entry level and low end positions, research on the relationship between pay and performance is hard to come by.  It mostly focuses on larger macro-economic effects rather than at the individual level.  Companies will generally argue that supply and demand keeps wages down and that the investment (e.g. paying more) in low wage workers isn’t a good one because of high turnover rates.  This makes sense because finding a $.50/hr difference in pay for someone making $10/hr or less is significant and would likely lead to them leaving.  Also, companies that hire a lot of low wage employees (think retail, call centers, and hospitality) have an incentive to keep labor costs low in order to maintain profitability.

My feeling is that companies should consider their low wage talent in a different light and pay them accordingly.  I was working on a project for a retail client and was involved in a discussion about their delivery drivers.  The meeting was about whether they should contract that work out to save money or keep it in house.  The point I made to them was that the customer’s last impression of them is based on the quality of service they receive from the delivery driver.  Why wouldn’t they want to have more control over that interaction?

To take this the next step, your customers’ experience with you is not going to be based on how well a division president does her job.  Rather, it will be based on the interaction they have with your low wage employees.  If they are so critical to your business, why wouldn’t you want to compete to attract, select and retain the best workers available in that pool the same way you would for managers and executives?

For more information on talent management, please contact Warren at 310 670-4175 or [email protected]

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