Why you should pay your employees as much as you can

Galen Emanuele,
Netflix CEO Reed Hastings
Ethan Miller | Getty Images

No matter what industry you're in, the bottom line of most businesses is the same: to maximize profits at all costs.

Every successful leader and organization knows that in order to maximize profits, it's absolutely imperative to hire and keep the best employees possible.

Seems simple enough, right? But ah, my dear Watson, this is where the problem lies. If a business is always looking to maximize profit, it'll be actively vested in trying to reduce expenses whenever possible — including (alas) employees' wages. The truth is that most companies pay employees as little as they can get away with. Which is perfect if you want a workforce who will, in turn, provide as little effort as they can get away with.

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Many companies are still rocking this archaic, backward thinking about compensation. While it seems like it may be cost effective to apply this profit-first mentality of low-as-possible wages, it ultimately cripples employee performance, engagement, and damages your bottom line.

Actors Basil Rathbone (left) as Sherlock Holmes and Nigel Bruce as Doctor Watson in the film 'The Adventures of Sherlock Holmes', 1939.
Silver Screen Collection | Getty Images

So how do we navigate this peculiar quandary? What's more important: keeping costs down or employees happy?

It turns out that the two go together hand in hand. We're talking PB&J levels of compatibility, people. Kimberly Weisul briefly breaks it down in this Inc post:

"This is the dilemma that fascinated Zeynep Ton, an adjunct associate professor at Massachusetts Institute of Technology's Sloan School of Management and author of the recently published The Good Jobs Strategy. After years of research, she determined that the answer lies partly in how management looks at their employees: Are workers mostly costs that detract from profitability, or are they engines that drive revenue growth? Ton's research suggests, counterintuitively, that companies such as Costco are more profitable precisely because of relatively high employee wages— not in spite of them."

The benefits of poorly compensating your people begin and end at lower labor costs...whereas the benefits of compensating employees well are limitless. Here are six compelling reasons to step up your approach to employee compensation:

1) Attract and keep exceptional employees by providing exceptional compensation

Great people don't work for garbage wages. They're smart and they know their worth, that's part of what makes them exceptional. If you fish at the bottom of the barrel, that's what you'll catch.

2) Employees aren't productive if they're searching for better jobs

Performance doesn't just drop a bit when an employee decides to leave or start looking for more lucrative employment — it throws itself off a cliff. After all, research shows that happy employees are reported to be 12 percent more productive than their less-than-enthused counterparts.

3) Prove to your employees that you value them over profits

Do this and they'll reward you for it by returning the sentiment in kind. Say hello to higher morale, loyalty, and engagement. Jon Muranko expresses this idea beautifully, writing that, "People are motivated by money only up to a certain point. After that, more intangible things like feeling valued, appreciated, and recognized take over."

Galen Emanuele

4) Low wages hurt your brand and social credibility

Consumers love doing business with companies that treat their people well. Many avoid companies that don't. This also impacts customer experience: when you interact with an employee who clearly doesn't care about their job, it's obvious, unpleasant, and a good reason to take your business elsewhere.

5) The higher the compensation the higher the expectations

If you pay employees generously then you can expect more from them and hold them to a higher standard. They will also expect more from themselves. If you want people to jump high, set the bar high. You can't excite top performers with low expectations.

6) Pay your employees well or your competition will instead

Step up or risk losing your best people to competitors. It gives them a huge advantage while you lose one fantastic employee after another—a loss which could affect your business more than you think. Human Resources Inc. says it best:

Employee turnover costs are largely hidden. They don't hit the profit and loss statement; they aren't line items in the budget. However, they have a very real and potentially deadly effect on your bottom line.

The truth is actual turnover costs are usually much higher than we think they are—until we estimate them. There are even sources that provide these turnover cost estimates: 30-50 percent of the annual salary of entry-level employees, 150 percent for mid-level employees, and up to 400 percent for specialized, high-level employees!

400 percent is certainly nothing to sneeze at.

We can break it down into a simple formula: hire great people, pay them well, and keep them.

For more inspiration on this topic, let's take a quick peek at Netflix's "Seven aspects of culture" deck. Created by Netflix execs Patty McCord and Reed Hastings, the simple Powerpoint has been dubbed "the most important document ever to come out of the Valley" by Sheryl Sandberg and has been shared over 13 million times on Slideshare since.

Justin Sullivan | Getty Images

So what's all the Netflix hubbub about?

One of the things that make Netflix's work culture so compelling is their approach to employee compensation. Netflix takes pride in distinguishing themselves from other companies, writing that "Unlike many companies, we practice: adequate performance gets a generous severance package." Aka being just good enough isn't good enough. They then go on to discuss their stance in more detail, stating that, "Paying top of market is core to high-performance culture." The implications of this policy are two-fold in that:

  1. They don't accept anything other than top performers and they're willing to pay for it
  2. It creates a thriving work culture. Providing employees with powerful incentives helps drive and attract top talent. Their commitment to always pay top of market also means a significantly higher employee retention rate, since employees will always feel like they're getting the best deal out there.

It's a two-way labor of love: a culture of reciprocity.

An employee's end of the bargain is their performance and effort. Yours is their work environment and compensation. If you don't deliver, they won't either. If you commit to giving as much as you can, your people will reflect that back to you. Harry West sums it up nicely in his post on "10 tips for retaining top talent":

If your business does a good job retaining its employees, you'll eventually develop employer advocates who become positive internal influences and community champions for your organization.

Your people are your army on the battlefield of business. Don't expect to win many battles armed with spears (a mediocre workforce) while your competition is arming themselves with machine guns (exceptional employees). If you can't see the value of that investment, then good luck trying to conquer the world with a few puny spears.

Galen Emanuele is an international speaker who teaches organizations how to create awesome workplace culture.

This article originally appeared on Shift Yes.

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