If executives believe that people are their most important asset—why is payroll considered a cost center rather than an investment? Labor costs are one of the largest items on the income statement. They are often the first place managers look to manage costs and increase profits. But that instinct to keep payroll costs as low as possible can be destructive.
Too many executives look at employee compensation for low and middle-wage earners as an expense with a low to no return. They see the short-term costs but do not necessarily understand the long-term value. They miss something pretty fundamental—that investing in paying low wage earners more can actually drive measurable business value.
Turning Around a Troubled Company
In 2014 I was named CEO of CareCentrix, a troubled health care services company. We faced declining margins, high turnover and stalled revenue growth. Our investors were pushing for change. For many companies, that might translate into cutting costs and managing headcount. I was determined to try a different playbook. After a period of lightning fast growth, CareCentrix had lost track of what powered its success in the first place—our people.
Like many companies, our entry-level employees started at the federal minimum wage: then, and currently, $7.25 per hour. According to our recruiting team, this was industry standard, and we had no shortage of people applying to start careers with us.
Despite this, I was troubled by turnover numbers that looked crazy high to me: in some areas nearly 50 percent of our employees were exiting our workforce within a year. But the more time I spent with our employees, the more I believed that our compensation approach was a problem. Many of our employees were struggling just to get by. We had one customer service representative living out of her car and another who struggled to afford diapers for her daughter. I shouldn’t have been surprised—there’s no county in the United States where a single person can live on $15,000 a year.
I ultimately came up with an unconventional approach: what if we froze the wages of the senior team and invested the money we saved into raising the wages of our entry-level employees? I proposed more than doubling the wages we paid, from $7.25 to the then-prevailing living wage estimate of $15 an hour.
After working it through with my executive team (which took some convincing), they agreed to a pay freeze. We dramatically raised the wages of nearly a third of our workforce. The results were immediate. Turnover dropped and productivity improved. Our investments in our people paid off, and translated directly into greater success for our business. CareCentrix returned to growth, more than tripling in size and more than quadrupling in value, before we sold the company to Walgreens in 2022.
The Problem with Low Wages
My experience at CareCentrix wasn’t a fluke. There’s a great deal of evidence that low wages, while they may look like a fast path to profits, actually limit companies’ success over the longer term.
Poverty keeps workers from performing their best.
Poverty is both mentally and physically exhausting. When an employee makes so little that they can’t afford rent and sleeps in their car, of course it impacts their work. If employees have to worry about paying their bills every month, it’s hard to imagine they are not unduly distracted and stressed at work.
In America today, approximately 40 percent of workers make less than the basic cost of living. That means nearly half of all workers in the U.S. are facing some sort of financial stress in their private lives, and this has to affect their professional lives. Surveys show that more than half of workers spend three or more working hours per week dealing with or thinking about issues related to their personal finances.
Turnover is expensive.
Replacing an employee, even a low-level one, is expensive. Most estimates put the cost of replacing an employee at between 30 to 200 percent of an employee’s annual salary. For an average company with 100 employees, turnover costs can reach up to $2.6 million per year. That’s expensive and avoidable.
Compensation is the number one reason why employees leave their jobs, with 55 percent of resignations being driven by the hunt for higher pay. In a Harvard Business Review survey, 62 percent of low-wage workers said that getting a raise or a promotion would make them more likely to stay with their current employer.
This is especially true for low-wage workers. They are the most likely workers to quit, making any business model that relies on the lowest minimum-wage work inherently unstable. Workers earning $7.25 an hour had a greater than 70 percent chance of leaving their job within a year. At $20 an hour, that number was halved.
Losing employees is a drag on productivity.
The precise amount of time varies by industry and position, but it typically takes workers a significant amount of time to reach peak productivity—which could mean months or even years. Companies with the highest turnover rates have the biggest challenge. At fast-food restaurants, for instance, it takes about four months for an employee to reach an expected level of productivity. That’s significantly below the average for most other jobs, but more than 50 percent of fast-food employees quit before they reach three months on the job—which means that a typical fast-food restaurant likely has more than half its staff working below peak productivity.
The Solution
For companies struggling with productivity and high turnover rates, the solution to their problems is clear—pay their lower-wage employees more.
The evidence shows that it’s an investment that pays for itself. In 2019, a study by the London School of Economics found that employee satisfaction was directly correlated with not just employee productivity, but business profitability and higher customer loyalty. The connection even extends to stock prices. The companies that were ranked by their employees as the “100 Best Companies to Work for in America” from 1984 to 2011 had reliably better returns on the stock market than their competitors, with average annual growth 2.3–3.8 percent higher than their peers who weren’t on the list.
This tracks with my experience as CEO of Carecentrix and what more and more executives are realizing. Raising wages for lower-wage workers isn’t a waste of money, it’s one of the best investments a company can make.