# Why pay more?



## newtothis (16 Oct 2016)

Interesting piece in today's NYT:

http://www.nytimes.com/2016/10/16/u...and-higher-sales-it-paid-its-people-more.html

The basic argument is that if you pay higher wages you can get better results.

It's always baffled me that companies will put minimum wage staff in direct customer contact and expect to build and maintain a top-class customer experience.

What do others think?


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## TheBigShort (16 Oct 2016)

newtothis said:


> Interesting piece in today's NYT:
> 
> http://www.nytimes.com/2016/10/16/u...and-higher-sales-it-paid-its-people-more.html
> 
> ...



Its common sense really. Ive never been comfortable with the classification of labour as cost in accounting terms. It is either an asset or liability. 
If a firm is making profit then the level of wages paid is a contributing factor to that, no different to machinery, premises or intellectual property.
If the firm is making a loss, wages could be a contributing factor.

The prevailing view is that labour is a cost, so the mantra exists that labour needs to be kept as low as possible for competitiveness. 
That makes sense to a point. But as illustrated in the article, increasing wages can provide for better quality of service, inducing higher productivity in the long run.


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## Firefly (16 Oct 2016)

newtothis said:


> Interesting piece in today's NYT:
> 
> http://www.nytimes.com/2016/10/16/u...and-higher-sales-it-paid-its-people-more.html
> 
> ...



I think it's a decision for a particular organisation to make, given its circumstances, profitability and strategy. It seems to have been the correct choice for Walmart, however Walmart have received bad press for low wages for years. Would it be the correct choice for all other organisations? I highly doubt it. 

The labour market could also be a contributing factor - if there is competition for labour, then not raising wages could see the organisation lose staff. The danger with an across-the-board increase in wages though is that poorly performing staff benefit and those who have better skills and work ethic will still not be compensated enough and will leave. 

Labour laws are probably also a contributing factor - if it is very difficult to let staff go (as in the case of large organisations in Ireland), expecting improved output just because you pay people more is probably not going to work. 





TheBigShort said:


> If a firm is making profit then the level of wages paid is a contributing factor to that, no different to machinery, premises or intellectual property. If the firm is making a loss, wages could be a contributing factor.



So when a firm is making profit the level of wages paid is a contributing factor, but if a firm is making a loss, wages could be a contributing factor?


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## TheBigShort (16 Oct 2016)

Firefly said:


> So when a firm is making profit the level of wages paid is a contributing factor, but if a firm is making a loss, wages could be a contributing factor?



Yes, obviously, unless the business has no actual employees and therefore no wages.
But if the business does have employees and is making a profit, clearly those wages contribute to the profit making.
On the otherhand, if the business is making a loss, it does not necessarily mean that the wages are the primary cause. A spike in energy costs for example could be the cause of the losses.


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## Firefly (16 Oct 2016)

TheBigShort said:


> Yes, obviously, unless the business has no actual employees and therefore no wages.
> But if the business does have employees and is making a profit, clearly those wages contribute to the profit making.
> On the otherhand, if the business is making a loss, it does not necessarily mean that the wages are the primary cause. A spike in energy costs for example could be the cause of the losses.



You can't have it both ways - a sudden drop in energy costs could just as easily be the cause of the profits.


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## TheBigShort (16 Oct 2016)

Firefly said:


> You can't have it both ways - a sudden drop in energy costs could just as easily be the cause of the profits.



Of course you can. You cant have profits in the first instance without labour. So if energy prices fall, it, with a combination of labour, can be the factors contributing to profits.


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## Purple (17 Oct 2016)

TheBigShort said:


> Of course you can. You cant have profits in the first instance without labour. So if energy prices fall, it, with a combination of labour, can be the factors contributing to profits.


You can't have profits without the energy used to power the lights, machines, computers etc either. 
And if they rise that, with a combination of labour costs, and all other input costs, contributes to the loss.

You can't have it both ways.


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## newtothis (17 Oct 2016)

Firefly said:


> I think it's a decision for a particular organisation to make, given its circumstances, profitability and strategy. It seems to have been the correct choice for Walmart, however Walmart have received bad press for low wages for years. Would it be the correct choice for all other organisations? I highly doubt it.



Why not? The interesting thing about the example is precisely becuase it is Walmart: they became a by-word for poor employment practices and the last place anyone would want to work precisely becuase they saw staff as little more than a cost.



Firefly said:


> The labour market could also be a contributing factor - if there is competition for labour, then not raising wages could see the organisation lose staff. The danger with an across-the-board increase in wages though is that poorly performing staff benefit and those who have better skills and work ethic will still not be compensated enough and will leave.
> 
> Labour laws are probably also a contributing factor - if it is very difficult to let staff go (as in the case of large organisations in Ireland), expecting improved output just because you pay people more is probably not going to work.



I don't think anyone's suggesting that blindly increasing everyone's wages will much of a positive impact. In the Walmart case, it was accompanied by extensive training programs. It’s more about seeing staff as an asset to be valued rather than simply a cost.

Of course, this is exactly the way those at the top like to see themselves: executive pay needs to be high to act as an incentive. I’ve always thought it amusing that those same people will argue that those lower down should have minimal wages and increases, due to the need to “be competitive”. Talk about cognitive dissonance…..

My own view is that especially for companies that have a large workforce interacting directly with customers, as in the Walmart case, paying minimal wages and treating them badly is likely to have a very negative impact on sales and profitability. At a macro level too, having high percentages of the population on low wages will inevitably have negative consequences for consumer spending.


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## Firefly (17 Oct 2016)

TheBigShort said:


> Of course you can.* You cant have profits in the first instance without labour*. So if energy prices fall, it, with a combination of labour, can be the factors contributing to profits.



If you are correct, then surely you can't have losses in the first instance without labour also...


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## Firefly (17 Oct 2016)

newtothis said:


> Why not?



Because....



newtothis said:


> I don't think anyone's suggesting that blindly increasing everyone's wages will much of a positive impact.






newtothis said:


> Of course, this is exactly the way those at the top like to see themselves: executive pay needs to be high to act as an incentive. I’ve always thought it amusing that those same people will argue that those lower down should have minimal wages and increases, due to the need to “be competitive”. Talk about cognitive dissonance…..



I agree with that. The pay and benefits for many at the top are way out of kilter with what is deserved. The pay in most cases is reviewed and approved at a compensation board probably stuffed with cronies from other boards (you scratch my back, I'll scratch yours). The issue really though, is how is this fixed?





newtothis said:


> My own view is that especially for companies that have a large workforce interacting directly with customers, as in the Walmart case, paying minimal wages and treating them badly is likely to have a very negative impact on sales and profitability.



Again, it depends. If you are a supplier of parts for iPhones in China and you decide to pay your staff more, then someone else will just make them for less (given the abundant supply of cheap labour) and your staff will lose their jobs. I'm not for low wages by the way, just calling it as I see it. If on the other hand you employ skilled consultants, then if you don't pay them properly they will leave. It's basic supply & demand.




newtothis said:


> At a macro level too, having high percentages of the population on low wages will inevitably have negative consequences for consumer spending.



I would agree normally, but let's take the tee-shirt business in Indonesia. If they raise wages too high the business could move to Vietnam, depressing the economy in Indonesia. Similarly, if the cost of going on holidays to Spain increases too much, people will start to consider other locations. Again, supply & demand.


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## Purple (17 Oct 2016)

A business or organisation should pay enough to get and keep a suitable number of suitable people to fill the roles they need. If they don't pay enough they don't get and keep suitable people and therefore labour as an input cost will not perform properly. If they pay too much then they get labour to perform at a suitable level but it will still cost them money as the pay levels are higher than the possible return on that labour to the organisation.

Of course training, facilities, Terms and Conditions etc all feed into the desirability of the overall "Package" to prospective employees. If the headline pay is low bit there is a defined pension, paid sick leave, long holidays, a short working week, flexi-time, total job security, a low stress working environment, free city center parking etc the overall package can still be attractive.


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## TheBigShort (17 Oct 2016)

Purple said:


> You can't have profits without the energy used to power the lights, machines, computers etc either.
> And if they rise that, with a combination of labour costs, and all other input costs, contributes to the loss.
> 
> You can't have it both ways.





Firefly said:


> If you are correct, then surely you can't have losses in the first instance without labour also...



Its like ye have an impulsive reaction to pick holes in anything I say.
Of course you cant have losses without labour, where did I say otherwise?
Its simple, if the return on investment exceeds the cost of inputs, labour, energy, machinery etc, then that will return profit.
If the return is less than the cost of inputs, then that returns a loss.
Its possible that labour inputd are a contributing factor, or in part a contributing factor, or its possible that other input have become excessive other than labour.
Therefore it is logical to conclude that if a firm is losing money _it may_ be down to its labour inputs, or other inputs or a combination of inputs.
Ditto for profits, it may be that profits are not as high as planned due to increased labour costs, but one thing is certain, labour _is _a contributing factor to profits.


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## Firefly (17 Oct 2016)

TheBigShort said:


> Its like ye have an impulsive reaction to pick holes in anything I say.
> Of course you cant have losses without labour, where did I say otherwise?



Not really - just seeking clarification.. You firstly argued that when a firm is making profit the level of wages paid is a contributing factor, but if a firm is making a loss, wages could be a contributing factor. You are now saying (rightly) "Of course you cant have losses without labour". So, if "you cant have losses without labour" (your words), the if a firm is making a loss, level of wages paid is a contributing factor, just like if the firm makes a profit.

The level of wages are a factor whether the firm makes a profit or loss. Get the wages too high and you will lose money (and jobs!), get wages too low and your staff will leave. It's a balance and it requires knowledge and appreciation of supply and demand for the labour you require.


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## Firefly (17 Oct 2016)

Purple said:


> Of course training, facilities, Terms and Conditions etc all feed into the desirability of the overall "Package" to prospective employees. If the headline pay is low bit there is a defined pension, paid sick leave, long holidays, a short working week, flexi-time, total job security, a low stress working environment, free city center parking etc the overall package can still be attractive.



Can you imagine getting all of this and your wages are higher than in sectors where little or none of this is provided?


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## newtothis (17 Oct 2016)

Purple said:


> A business or organisation should pay enough to get and keep a suitable number of suitable people to fill the roles they need. If they don't pay enough they don't get and keep suitable people and therefore labour as an input cost will not perform properly. If they pay too much then they get labour to perform at a suitable level but it will still cost them money as the pay levels are higher than the possible return on that labour to the organisation.



So you see staff in terms of an inout cost to a business, the same as any other (e.g. utility charges)?

I'd agree absolutely that for any particular role there is a going rate for the job. You have three choices: pay below, at or above the going rate (by "pay" I'm including total package, by the way, and also using it as a shorthand for being a good employer in terms of conditions and access to training etc.). I'm suggesting that particularly for roles that are customer facing (not necessarily sales, they could be support), you are likely to see better results in terms of sales and profit by being at the upper rather than lower end of that scale. This is unlike other costs: I can't think of a reason why paying more for electricity or rent would be of any benefit for example.

The Walmart experience would seem to provide some evidence for this. It’s also something I’ve paid attention to in my own business, and so far it seems to be working.


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## newtothis (17 Oct 2016)

Firefly said:


> The level of wages are a factor whether the firm makes a profit or loss. Get the wages too high and you will lose money (and jobs!), get wages too low and your staff will leave. It's a balance and it requires knowledge and appreciation of supply and demand for the labour you require.



Clearly wages are a cost, but as per my comment just now I don't believe it is as straightforward as you make it to be. If it was, then all you'd have to do is minimise wages to a level where you can just about manage to hold onto staff (i.e. pay at or below the going rate) and you maximise profits.

As I said, I don’t believe that minimising wage costs necessarily maximises profits: better to optimise the type of person you are employing, and if that involves paying at the upper end of the going rate, so be it.


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## Purple (17 Oct 2016)

newtothis said:


> So you see staff in terms of an inout cost to a business, the same as any other (e.g. utility charges)?
> 
> I'd agree absolutely that for any particular role there is a going rate for the job. You have three choices: pay below, at or above the going rate (by "pay" I'm including total package, by the way, and also using it as a shorthand for being a good employer in terms of conditions and access to training etc.). I'm suggesting that particularly for roles that are customer facing (not necessarily sales, they could be support), you are likely to see better results in terms of sales and profit by being at the upper rather than lower end of that scale. This is unlike other costs: I can't think of a reason why paying more for electricity or rent would be of any benefit for example.
> 
> The Walmart experience would seem to provide some evidence for this. It’s also something I’ve paid attention to in my own business, and so far it seems to be working.


I see staff as the key part of the business but that's the nature of the business I'm in.
A business owner should feel a sense of responsibility to their employees. The same is not true of utility providers.
Rent is a good example of a cost which can be higher but add more value; if you rent a shop in a better location you may get a higher turnover. However if you are in a price sensitive or low margin sector that higher rent may never be justified.


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## TheBigShort (17 Oct 2016)

Firefly said:


> You firstly argued that when a firm is making profit the level of wages paid is a contributing factor, but if a firm is making a loss, wages could be a contributing factor.



Yes, what dont you understand about that? Or rather, what about it is rattling your cage?
Are you saying that the wages in all loss making businesses are the contributing factor in all cases? 
Are you suggesting that Transdev Irelands reported €700,000 loss for the previous financial year was down to wages, only for a 18% increase in wages to be settled on?
Transdevs loss wouldn't have had anything to do with capital outlays for future expansion by any chance?
Can you outline a scenario where a profitable company, that pays wages, where the labour attached to those wages is not a contributing factor in the profits?


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## Firefly (17 Oct 2016)

TheBigShort said:


> Yes, what dont you understand about that? Or rather, what about it is rattling your cage?
> Are you saying that the wages in all loss making businesses are the contributing factor in all cases?
> Are you suggesting that Transdev Irelands reported €700,000 loss for the previous financial year was down to wages, only for a 18% increase in wages to be settled on?
> Transdevs loss wouldn't have had anything to do with capital outlays for future expansion by any chance?
> Can you outline a scenario where a profitable company, that pays wages, where the labour attached to those wages is not a contributing factor in the profits?




I'm saying that if wages are a factor if a firm makes a profit, then they are a factor (as opposed to be "could" be a factor) if the firm makes a loss. Ditto for profits. 

As for your last question, I agree and my point is that the opposite is also true....a loss making company, that pays wages, the wage costs would be a contributing factor in the loss

I took it from your original post that wages are only a factor when the firm makes a profit but only could be a factor if the firm makes a loss. Anyways, I've explained it yet again as best as I can.


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## Gerry Canning (18 Oct 2016)

Seems to me .

The companies that pay slightly above the average for a given job , seem also to generally have better general conditions for workers, it ends up in a virtuous loop., in that staff perform better , without too much (sick ? leave and other problem issues that are hard to quantify),yet are a drain on company profits.

In short Good Companies (not just high wage companies ) attract and hold and respect good staff, and staff in return work well.
..........................................................

How often have we heard of companies  , (they pay well but ?) they end up turning over staff and that ain,t profitable .
..................
New to this;
I find that people fronting an organisation , in spite of a lot having poor wages are still pleasant and helpful.I do not think customer facing staff get the recognition they deserve.


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## Leo (18 Oct 2016)

Gerry Canning said:


> In short Good Companies (not just high wage companies ) attract and hold and respect good staff, and staff in return work well.
> ..........................................................
> 
> How often have we heard of companies  , (they pay well but ?) they end up turning over staff and that ain,t profitable .



This is a well researched area, Maslow's work in motivation dates back to the 1940's. Once pay rises to a certain level where people feel secure, there's a diminishing return in any additional motivation/ commitment for further hikes in pay. Beyond that point, recognition, a sense of belonging and allowing people to reach their full potential is where it's at. Of course, it takes a really open and committed management infrastructure to foster that kind of environment.


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## newtothis (19 Oct 2016)

Gerry Canning said:


> ..................
> New to this;
> I find that people fronting an organisation , in spite of a lot having poor wages are still pleasant and helpful.I do not think customer facing staff get the recognition they deserve.



I couldn’t agree more. Many of the industries that have a high level of direct customer contact – retail, cafés, restaurants etc. have notoriously low wages. My current business happens to be in one of those areas. Before we started, as part of research I spoke to business owners in the sector. I recall one conversation where it was one long moan about how difficult it was to get and keep good staff. It turned out they were paying minimum wage: pretty much the going rate for the job. I thought at the time, why would you put someone on a minimum wage front and centre with building your reputation with customers?


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