CEO Coaching: Treat People Like Gold and You’ll Have More Gold!

A recent Wall Street Journal article (“How Higher Wages Can Increase Profits”) indicates that higher wages can not only reduce turnover and increase recruiting of talented people (no real surprise there) but also increase productivity in existing staff. So higher wages in this example (expense for the business) can achieve higher profit—pretty cool! Mysterious altruism at work? As a CEO, it’s worthwhile exploring the science behind this as too often compensation is done on the fly.

I cut my teeth in a multiunit retail setting where payroll was one of the top expenses companywide. If you threw in general and administrative (G&A) labor, it was the largest expense (stay with me so we can get through the dry stuff to get to the point). We tightly monitored payroll-as-a-percentage-of-sales but let local management determine how to handle it. In fact, even if that line item seemed high, but the store or region produced a high level of unit profitability, we typically ignored it.

Some stores achieved high profit margins with low payroll costs (we eschewed the terms “labor” and “employee”), because they had fewer people. But they were damn good and worked hard, supporting the notion of “gift exchange” that economists espouse (i.e., treat people better than market forces, and they’ll reward you with more and better work). It also turns out that when and how you increase wages makes a big difference.

I’m not a fan of government-imposed wages for several reasons, but I am a big fan of businesses that can create wealth and happiness for their people. The fact that it’s good business to treat them better than the company down the street delights me. It’s not about minimizing rewards; it’s about optimizing them! When you are pondering compensation it is prudent to look not only at the field of accounting, but also psychology and behavioral economics!

The research in the above-mentioned article tries to isolate compensation as a factor, and the message is that more expense in this area on your income statement might achieve higher profits. But if you think about the sum of all rewards, the conversation gets much richer and more fun! If you can create a supportive, inspiring, high-energy culture that’s challenging and rewarding and provides higher compensation, you have a real competitive advantage! Think about managing your culture as carefully as you manage your expenses.

There are a lot of reasons to treat your people like gold that have nothing to do with profit and for you that may be good enough. But the fact that capitalism (done right) and humanitarianism are often aligned is a pretty cool thing.

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