Why Companies Can Profit By Paying You More

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Here are some hard facts: Income inequality in America is almost double that of other developed nations, two thirds of our national wealth is concentrated in the hands of the top 5 percent richest Americans, and 95 percent of income gains since the financial crisis have accrued to top wage earners, leaving rank-and-file workers still struggling for a piece of the pie.

While no one actually celebrates inequality, the business community does not see the issue as one of fairness but of economics. At higher wages, businesses cannot afford to employ the same number of people, which creates a whole new problem.  The solution, then, is to identify the economic value in paying higher wages, and make a business argument for it rather than a moral one:

Skilled Labor

Consumers today demand highly specialized products and services, and a specialized marketplace requires knowledgeable and skilled workers. While the automation of physical tasks might require fewer workers for the same job, the jobs themselves are more technical.  On the manufacturing front, some 600,000 jobs remain vacant in the US due to a lack of skilled labor, and most workers are 45 years or older, which means that unless industry actively provides training for the next generation, we will eventually have an even bigger shortfall.  This is also not to mention that our economy today is highly dependent on information technology and knowledge-based services, which require higher education.

Some companies do provide training for employees, but for the most part workers are expected to learn new skills themselves. For low-wage workers with little time or money, however, that is a Herculean task. Eventually, this will lead to an acute shortage of skilled labor in America, which will weaken the competiveness of domestic businesses and open the door for foreign companies to fill that void. To avoid this, companies should invest in their workforce, either through better wages or direct sponsorship.

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Productivity

Many businesses consider healthcare benefits (which are a form of wages) an avoidable expense. The ongoing and heated debate over the employer mandate of Obamacare underscores this point.  Yet good healthcare, especially when it is preventative, can save companies money over time. Workers in better health are more alert and productive. Sick employees cost businesses money by missing work or being late, being unable to perform their duties, making mistakes, and even making their colleagues sick. It is estimated that the US economy loses $576 billion a year due to this factor, of which $227 billion is attributable to lost productivity alone.  What this means is that lost productivity is extremely expensive and is something companies should factor into their calculations when considering the pros and cons of offering benefits.

Innovation

Not all workers are inventors. However, successful innovation is not just the result of technical skill or creativity but of careful observation of what customers want. The most profitable ventures come out of fulfilling an important need in the market, and that need is best identified by those who are in the trenches with customers every day. These could be sales people but they could also be customer service representatives and even a cashier who interacts with customers and hears their complaints and requests. Yet some of these workers also tend to be the lowest paid, so they have little incentive to share the feedback that could help their company innovate, and that is a loss for businesses.

Amazon (Ticker: AMZN), which was ranked as the second most innovative company in the US in 2013 and is one of the most successful companies in the world, actively encourages its frontline workers and even interns to conduct experiments based on customer insights, and it values their input highly.  So highly, in fact, that it not only pays most workers full benefits and stock awards on top of their salaries, but also pays for 95% of the tuition for courses that its employees may want to take – even if those courses are not directly connected to their work.

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Customer Service

Good customer service fosters consumer loyalty and enhances profitability, whereas customer dissatisfaction can damage market share (consider how AT&T’s consistently poor customer service rankings hurt its business in the past). According to customer research conducted by American Express, 66% of consumers are willing to spend 13% more on goods and services if they received better customer service, which are meaningful numbers.  But customer service is directly related to employee attitude, which in turn depends on wages. Companies need to recognize that even a small increase in wages can inspire a positive attitude in workers that will keep customers happy and coming back.

These arguments are not hypothetical but form part of a smart business framework which can translate into success through a stronger workforce, lower turnover, higher customer satisfaction, profitable innovations, and eventually, better performance.  In addition to the examples cited above, companies such as Whole Foods (Ticker: WFM) and Costco (Ticker: COST) have also adopted this philosophy with strong results. Both companies, which pride themselves in paying their workers well above the living wage and better than their competitors, are highly profitable, well-respected, and currently trading at 5 year highs.  While their success may not be solely the result of employee satisfaction, there is no reason to believe that it is not a contributing factor since a motivated workforce leads to better service, better ideas, and more efficiency.

Higher wages, therefore, can be good business.

Sanjay Sanghoee is a political and business commentator. He has worked at investment banks Lazard Freres and Dresdner Kleinwort Wasserstein, at multi-billion dollar hedge fund Ramius, and has an MBA from Columbia Business School. His articles have appeared in FORTUNE, Bloomberg Businessweek, Christian Science Monitor, and Huffington Post, and he has appeared on CNBC’s ‘Closing Bell’, TheStreet.com, and HuffPost Live on business topics. He is also the author of two thriller novels. For more information, please visit http://www.sanghoee.com.

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