The Key to Boosting Corporate Profits: Pay Employees More

Gabrielle Karol

So how exactly do good benefits lead to higher profits?

  • Less turnover. Employees who are very or extremely satisfied with their benefits are six times more likely to stay with their employers than workers who are dissatisfied, and 49% of workers surveyed by Aflac said that improving benefits would convince them to stay at their current jobs.
  • Less absenteeism. Good health care and wellness benefits improve employee health, which in turn improves productivity and cuts back on productivity losses associated with absenteeism. On average, productivity losses related to personal and family health problems cost employers $1,685 per employee annually.
  • Attract better talent. Better benefits packages make employers more attractive to prospective employees–which means a more talented workforce.

Starbucks, one of Fortune’s “100 Best Companies to Work For,” had a net revenue of $11.7 billion in fiscal year 2011. Its 95,000 part-time employees get full health insurance benefits, stock awards and free coffee. We’re sure it’s not just the caffeine that keeps those baristas revved up to go to work!

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2. Promoting From Within

This keeps employees happy because it makes workers feel that hard work will be rewarded, and that there’s room for growth at the company, which cuts down on turnover.

Costco started promoting from within for 98% of open positions, and after the first year of employment for line workers, turnover fell to less than 6%.

Additionally, external hires are more expensive and less successful, on average, than employees promoted from within. Employees hired externally made 18% more than those who were promoted internally to the same position, and they were 61% more likely to be fired.

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3. Providing Successful Training

A study conducted at the University of Guelph in Ontario, Canada, found that structured training and orientation for new employees made workers feel more confident and satisfied with their new positions.

The Container Store, for instance, places a huge premium on employer training: Each branch has its own full-time trainer, and new employees receive more than 241 hours of training within the first year, compared to the industry average of seven hours. As a result, the turnover rate at the Container Store is just 15-20% in an industry where 100% turnover year to year isn’t surprising. Additionally, 41% of new hires come from current employees, which also speaks to worker satisfaction.

4. Offering Generous Compensation and Financial Incentives

Profit-sharing opportunities, stock options and generous compensation packages increase employee satisfaction and loyalty. Along this line of thinking, a study from McGill University found that concentrating on the workers at the bottom rung pays off in profits for the company as a whole.

For example, Costco pays workers 42% more than competitor Sam’s Club. While this means higher overhead costs, the increased wages pay for themselves in terms of higher productivity and lower turnover. Additionally, higher wages attract better talent. The Container Store pays its full-time clerks $44,000 a year, and its wages are 50-100% higher than the retail industry average. As a result, the company had 1,500 applications for 60 positions when it opened a store in Edina, Minnesota.

When American Apparel provided a financial incentive to each worker to sew more garments, the company was able to triple its productivity. Providing stock options to employees has also been shown to increase productivity, due to a heightened sense of ownership and responsibility. (And being able to work from home makes us healthier and happier.)

Lastly, being known as a fair and generous employer increases a company’s value in the eyes of local communities. Because of its generous wage structure and opportunities for internal promotion, Costco faces less community opposition than its competitors when looking for new locations for stores and warehouses.

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Treating Employees Well Really Does Pay Off

These reports and case studies show that putting employees first benefits both workers and companies as a whole.

As Jason Fried, the CEO of 37 signals, told Fast Company: “Lots of [companies] burn people out with 60, 70, 80 hours of work per week. They know that both the people or the company will flame out or be bought or whatever, and they don’t care, they just burn their resources. It’s like drilling for as much oil as you possibly can. You can look at people the same way.”

The takeaway?

Even though it’s counterintuitive, paying employees more can actually lower costs.

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