I find it amazing how many entrepreneurs and business owners get burned by thinking about things incorrectly.
Here’s an example from a recent conversation I had with an entrepreneur who sells professional services. His sales were strong, but his profits were weak. In trying to figure out a solution, he started by suggesting he layoff part of his staff. If he cut his staff, costs would go down and profits would go up.
However, he then realized that if he had less staff members, he couldn’t close as many sales nor complete as many projects. So, sales would go down about the same as costs, and profits would remain flat.
The solution I gave him was to cut costs by reducing his staff (either through layoffs or natural attrition) and to boost employee productivity. Because if he were able to serve the same number of clients with a smaller staff, then profits would rise. In fact, if the staff were pared down enough, he could even afford to pay each staff member more than they currently make.
There are several great example of this “reverse logic” of paying employees more to increase profits.
One example is The Container Store. The Container Store has just one employee for every three their competitors have. But, they pay their employees double the industry average and spend 160 hours training them.
What is the result of this strategy? The Container Store employees are better trained and happier, and thus provide superior service. All this at a 33% lower cost than competitors.
Interestingly, when The Container Store opened in New York City, it had 100 times more applications than available positions. With numbers like that, they can hire the best of the best each time.
Similarly, Harry Seifert, CEO of Winter Garden Salads gives employees bonuses just before Memorial Day, when demand for its products peak. The bonuses boost morale and cause the company's productivity to jump 50% during the busy period.
Paying employees more to improve performance and boost company-wide profits is a historically proven tactic. In fact, back in 1913, Henry Ford doubled employee wages from $2.50 to $5.00 per day. The move boosted employee morale and productivity and caused thousands of potential new workers to move to Detroit.
Your employees can and should be a source of your competitive advantage. Recruit them slowly and wisely. Train them well. Give them a voice in your company and respect them. And pay them well. When you do this, you’ll have employees that perform at three times the level of your competition. And even if you pay them double the industry average, you’ll still have huge profits and outperform your competitors.