How low salary is not low cost (always)

Low salary is not low cost

Cutting or keeping salaries low does not always mean lower costs for the company.

In Dubai where I live, and in other GCC countries, many organisations rely on cheap (imported) labour in order to manufacture, distribute and sell their products.

A lot of HR Directors don’t necessarily believe in this “cheap cheap cheap” approach, but they struggle to get heard by the leadership team, and they often ask me how to convince the CEO and CFO to try on new approaches.

The high cost of low wages

When faced with this question, I like to tell my clients about the example from the Wayne Cascio study that compared two US retailers. In his HBR article related to the study, he contends that “when it comes to wages and benefits, a cost-leadership strategy need not be a race to the bottom”. How did he prove such an assertion and that low salary is not low cost ?

Around the globe, we’ve all heard of Walmart and its “Always low prices” approach. It’s also often (in)famous for its low salaries and minimal benefits.

Less known internationally, Costco is another retailer focused on offering low prices. But their rewards approach was/is a lot more generous than that of Walmart.

Back in 2005, Costco employees were earning 40% more than Sam’s Club staffers (Sam’s Club is Walmart’s low cost retail chain), and most of Costco’s employees benefitted from health insurance while less than half of Sam’s Club employees were enrolled in a scheme.

In a world where we get bombarded with “labour costs are one of the largest costs”, and in an industry and niche with such low margins, this seems counter-productive, right ?

Financial analysts were not really pleased with this approach at Costco either, hinting that employees were better treated than investors/shareholders at Costco.

However, Wayne Cascio’s study revealed that these higher salaries were correlated to a number of financial benefits :

  • A much lower employee turnover rate at Costco than in the industry (17 vs 44%, which was also Sam’s Club rate). This translated in hundreds of millions of dollars in savings done on replacement costs.
  • And a higher productivity per employee. In 2005, revenue per employee stood at 636,000 USD at Costco, vs 336,000 USD at Sam’s Club.

What does this teach us ? That paying your employees less does not necessarily mean reducing costs.

As the full study says : “In the words of CEO Sinegal, : “We pay much better than Wal Mart. That’s not altruism, that’s good business” (Shields 2005)”

How HR can use this as an example to gain acceptance for revising salaries

As HR, it is our role to perform studies to simulate the impact of our compensation and benefits practices, not just in terms of direct labour costs, but also in terms of other effects which may be less obvious to see, but may have the same, or an even bigger impact, on revenue, cost savings, or productivity.

Use what you have and go beyond the simple benchmarking approach that most of us adopt : “market is moving by x% so we must move by x% as well”, or “we need to pay at market median and therefore need to increase salaries by y%”.

Instead, with your C&B team, and your HRIS team, dig into employee engagement rates in correlation with employee turnover, look at real costs of replacing employees if you have enough data (in his study, Wayne Cascio used a very conservative 60% of annual salary instead of the widely accepted ratio of 1 to 1.5 times for calculating replacement costs), compare your numbers with that of your industry, analyse the financial statements of your direct competitors…

And then prove your business-savvy, and make your case for increasing the salaries or allowances of your employees.

When you speak their language, which is about increasing profit, and not “fluffy HR talk about making employees happier”, you increase the chances of your salary review proposal being listened to and considered as what it is : a valid business proposition. You will convince them that low salary is not always low cost. And you will know that once more, you’ve proven that you deserve that seat at that table.

 

Related posts :

Share the Knowledge !
Get Free Updates

Comments

  1. Very informative article – Thanks Sandrine. As you correctly mention here, to interact with Business leaders in C&B related issue , C&B practitioners require to speak business language and use the power of big data… Any other advises you recommend to use to enable win/convince business in winning complex C&B related issue?

Speak Your Mind

*