The ROI from paying a fair living wage

Person holding money - ROI from paying a fair living wage - Photo by Sharon McCutcheon on Unsplash

The ROI from paying a fair living wage

One of my favorite quotes on the topic of wages is from Robert Bosch:  “I don’t pay good wages because I have a lot of money. I have a lot of money because I pay good wages”.    Having built and sold a successful company, I couldn’t agree more.  I know for a fact that my company, LetterLogic, was successful BECAUSE of our employee-first culture, which included a fair living wage and a monthly, equal share of the profits.

A “Fair Living Wage”- what the heck is that anyway?

I’m going to venture to guess that if you don’t already have a strong opinion on this topic, you’ve probably never been a minimum wage worker…except maybe during your high school years.   But if you’re a business owner who employs any workers who would ordinarily be paid on the lower end of the pay scale, then I want you to give me just a few minutes…because I believe that your business will suffer if you aren’t paying your people enough.  Bear with me.

People who argue against raising the federal minimum wage often say that small businesses will be crushed if they have to increase their wages – that it will drive them out of business.  That simply has not been my experience.  Here’s what happened with me:

I started LetterLogic in my basement.    It was not surprising that I was unable to get a business loan because I had only a high school education and no leadership experience, so I funded the startup with the proceeds from a week-long yard sale plus cashing in my 401k.   We grew quickly and just 18 months later moved from my basement to a 27,000 square foot factory.

Though some of our jobs were in high-paying IT work, about ½ of our employees performed production tasks for which we could have paid minimum wage. In Tennessee, that’s $7.25 an hour.  But we didn’t.  Instead, the starting wage for those jobs was $12 an hour and that seemed fair until I heard a director of a publicly owned company define “fair living wage”.   His definition forever altered the way I look at this issue.

What did he say that was so pivotal?  He advised me to imagine that our two lowest wage earners started dating….and eventually married.  Based on their joint salaries, in OUR city, in what part of town could they afford to live?  Was it a safe neighborhood?  Would they be able to save money so they could one day buy a home?  To have children?  To save money for the education of their children?  And using THAT model, we set the standard for what our people needed to be paid.

We had to raise our wages. During a span of just a few months, we changed our starting minimum wage from $12 to $16 an hour.  Did it halt our growth, bankrupt us?  Did it hamper us in any way?  No, it didn’t.    In the following 18 months, we quadrupled EBITDA!   Yes, our profitability took off like a rocket.  And our company grew to $40 Million annually, with no debt, before I sold it in 2016.

Of course, it wasn’t just that we raised the hourly wage and then magically became more profitable; we made a lot of other smart decisions in that time span.  BUT, paying our people more was absolutely a factor.

If there are people in your community who are willing to work for just $10-$12 an hour, how could it possibly be holding your company back to pay just that?    Here’s a few ways:

  1. Because those workers are not focused. They are not fully engaged when they’re at work.  Why?  Because all they can think about is how they’re going to get the money for the past-due rent.  About whether or not the kids are safe, home alone because they can’t afford child care after school. About when, not if, the electric company is going to cut off the power.  They’re consumed with worry…and fear.
  2. Because of what you’re paying them, they have to work two jobs just to make ends meet. Which means they don’t get enough rest so they’re tired and not as productive. No matter how conscientious they are or how good their intentions are, they simply can’t give you 100% because they are so depleted.
  3. You hire them and train them and pay them as little as possible…and then you’re angry and frustrated when a competitor offers them 25 cents more an hour and they leave you.  You have to start all over again, wasting precious time and resources. It is extremely difficult to consistently deliver high quality goods and services if you are continually hiring then losing employees.

Imagine the life of employees working at minimum wage –  the single mom forced to work 2 jobs. She must rush home after her first job to change clothes to run to her second one, not able to help the kids with their homework, or cook dinner for them, or bathe them and read to them, or to tuck them in for a good nights sleep.    No, the children must fend for themselves,  eating breakfast bars and frozen pizza before falling asleep in front of the TV waiting for mom to come home.  The mom that is too exhausted even to carry them to bed.  She has just a few hours’ sleep before starting the entire cycle over again.

But what happens if that same workers is paid $15 or $16 an hour, making it possible for her to work only one job?  Let’s see:

She is at home with her children at the end of the work day, giving them the guidance and attention they need, able to tuck happy, well-fed, freshly scrubbed kids into bed at night. Finally, she gets to sit at the kitchen table to concentrate on an on-line course that is going to help her become more valuable to your company…and to get a promotion and raise.  In the morning, she is able to feed her children a hot breakfast, send them off to school, and get to work early enough to share coffee with her work friends and to plan her day.  She is rested and happy, with hope for a brighter future for herself and her children.  YOU made that possible by paying her fairly, and SHE is making it possible for your company to grow and prosper.

So, what happens if you pay your people more?

First, you’ll stop the churn.  You’ll attract the best people and they’ll become fiercely loyal to you and the company. They won’t be lured away  or distracted by poachers, so they’ll gain more experience and skills and become ever more valuable to your organization.

By taking care of your people and paying them enough to have a good quality of life – to actually pay their bills on time and to save money, you are freeing them up to concentrate on taking great care of the customer.  The result?  The customer becomes very loyal, developing a commitment to your company and your team.

When your company is known for outstanding products and services, you can charge more.  At LetterLogic, our reputation allowed us to be the most expensive in the industry and still to grow at a pace that enabled us to be named an Inc 5000 company for ten consecutive years.   When we raised our rates, the customers didn’t leave us – they agreed we were worth it!

The heart satisfaction is another matter. Few things have been more fulfilling to me than watching the employees of LetterLogic prosper financially.  I think of Maria, a young woman who had been working over 60 hours a week at a low-wage job before we hired her. On those long days, her husband would rush home to take care of the children after work instead of taking advantage of the overtime hours his employer was offering in his skilled construction job.  After Maria joined us and was being paid fairly for a reasonable 40-hour week, her husband was able to adjust his schedule accordingly, making more money.  Enough money to pay off their automobile loans…and to buy their first home!  That’s a valuable testament to the power of fair pay.

Certainly, there is a moral imperative to the fair living wage argument.  I’ll even go so far as to say that I don’t think you should be in business if you can’t pay your employees enough to meet their basic family needs.  But even if social responsibility is not a driving factor for you, then just go back to what Robert Bosch said.  “I don’t pay good wages because I’m rich.  I’m rich because I pay good wages.”  Think about wages as an investment, not an expense.  There is not a better ROI anywhere.