June 8, 2016 Comments Off on TALENT TALK: Why Paying the Highest Wage Rates Can Reduce Costs Views: 283 Connect Classroom

TALENT TALK: Why Paying the Highest Wage Rates Can Reduce Costs

Talent Talk is a regular column on employment trends written by Glen Esnard, the executive vice president and principal of 20-20 Foresight Executive Search. 

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“There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.” – Henry Ford

It seems remarkable that Henry Ford, who turned auto workers into single process machines to drive down costs, would look to pay “the highest wages possible.”

But in 1913, Ford hired 52,000 men to maintain a workforce of 14,000. The cost of turnover was destroying productivity. So Ford increased daily wages to $5 per day, approximately 50% over prevailing wages. Turnover rates plummeted, costs declined, productivity soared and profits increased.

More recently, Jack Welsh, in an apparent oxymoron, suggested organizations should strive for “the industry’s highest wage rates and the industry’s lowest labor costs.”

But it makes sense. Consider the following:

First, employee retention, or inversely turnover, is driven by many elements, not the least of which is compensation. Research has identified turnover cost as roughly 25% of employee compensation and over 200% of senior employee compensation.

Second, more talented or skilled employees improve both productivity AND quality. A trained, experience bricklayer lays more bricks per hour and leaves a better finished product. A talented designer produces more and better output. A higher-quality property manager can manage greater square footage and maintain more satisfied tenants.

While quality can be difficult to quantify, productivity is not. A 30% increase in productivity implies a direct 30% decrease in required employees. In this example, to the extent more productive talent requires a compensation premium less than 30%, cost savings is achieved. Now add in improved quality and more satisfied clients, and the results can be powerful.

A compensation strategy that recruits and retains the most productive talent, managed properly, will achieve net overall cost savings.

In our executive search business, we often find clients seeking to fill open positions prioritizing either the “right” talent (technical skills, experience, and cultural fit) or the right price.

Today, particularly as demand for talent strengthens, a focus on getting the right talent is critical to organizational and operating performance as well as operating costs. It is but another example in which paying the price for quality will prove to cost less.

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