How Raising Wages Increases Profit

I recently read an article in the Minneapolis Star Tribune about a business that had decided to increase its minimum wage in 2013. This small pizza business raised the employee wages to $10/hour for cashiers and servers. Pizza chefs earn $13/hour. This equated to $3 million in raises across the business, a financial risk to say the least.

This type of decision is addressed in businesses and companies across the nation every day. Companies protect their bottom line, and as a consultant, I see businesses and companies make the same choice repeatedly: freeze the raises.

They are under the misinformation that cutting employee wages will help make the company more financially solvent. But in truth, it just makes employees angry. And angry employees leave companies or reduce the quality and quantity of work because they are feeling under appreciated.

Let’s get back to the pizza business.

Anyone who’s done P&L knows the impact of raising employee wages by 20 percent. That money has to come from somewhere and usually it’s the company’s profits – something that is guarded like a bulldog. In a small business, those profits are directly related to owner revenue, so they do not typically relinquish them easily. For this pizza business to offer millions in employee wages is significant.

What was the impact of such a drastic wage increase?

Zero. Nada. Zip.

In fact, the pizza business is thriving and has just opened two more stores. But how can that be? How can they make a profit while spending more on operating expenses? Simple: employee retention and engagement.

The often overlooked indicator of a business is employee retention and engagement. It costs a company almost 16 – 20 percent of an employee’s wage to hire them, while other studies show hiring can be 6-9 months of wages . And let’s not discount employee satisfaction. By raising wages, the pizza company demonstrated not only how valuable its employees were, but how that it understood the hardships of trying to support themselves and/or their family on less than $10.00/hour.

The employees clearly felt this concern. Retention increased to above industry standards – holding onto to cashiers and servers for over 3 years and chefs for over 5 years. But it’s not just retention. It’s employee engagement, which leads to increase productivity and higher service. As an employee, I feel valued by the company and extend out that value to my customers. It’s a simple equation of treating others the way I am being treated.

So, the next time you’re thinking about your bottom line, think about the employees who are contributing to that bottom line and throw out the old math that says “a penny saved is a penny earned.” It doesn’t work when dealing with business. Try this one instead, “you need to spend money to make money.”

Your most valuable asset is not your product, but your employees. Spend wisely.

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