Paul Downs Vintage Blog – Does Higher Pay Make People More Loyal?

For many years, Paul wrote a blog for the New York Times about business life. Those postings eventually became the book, Boss Life: Surviving My Own Small Business. Paul’s book is available at your favorite local bookseller or on Enjoy this Vintage Blog from Paul’s contributions to the New York Times’ You’re the Boss Series.

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Does Higher Pay Make People More Loyal?

Last spring I exchanged e-mails with Amy Christensen-Waddell, president of Albion Swords, which makes reproduction swords and armor (and I thought my business was niche!). Discussing employee pay, she asked: “If your people are making a lot of money, do you find it makes them more loyal?” I didn’t give her an immediate answer, but the question has been in the back of my mind since then. Here’s my current thinking:

The desire to be loyal is part of the basic human operating system. The feeling that one is part of something, that one is enmeshed in a web of mutual obligation, is deeply satisfying. People will, given the opportunity, attach themselves to a very wide variety of things: to their family, to their pets, to their favorite sports team, to their church, to their country, to their employer, to the products they buy, to just about anything.

As a boss, I see loyalty as one of a variety of ways to get people to perform their jobs. Getting the work done (so you can make money) should be, in the end, the purpose of any company. So you need people to show up and make an effort. How do you get them to do that? First and foremost, you pay them: salary and benefits. No mystery about it. But how much pay is required to inspire real effort? Or, put another way, can feelings of loyalty be substituted for monetary compensation?

I can think of several situations where this might happen:

When the boss has a lot of charisma. Some people just plain inspire loyalty. Other people want to be with them, want to serve them, even when it’s not to their benefit. History is full of examples: Julius Caesar, Genghis Khan, Richard the Lion Hearted, Queen Elizabeth. The whole idea of royalty is based on this principle. People volunteered to die for the benefit of these leaders. People like this are still around, and can still inspire followers to sacrifice on their behalf. In our modern business culture, the sacrifice is less than total, but think of all the unpaid interns and apprentices, or the ill-used production assistants, all circling the charismatic likes moths around a flame.

When the organization is prestigious. People will give up some income if they can brag to others about where they work. When I was installing work at the New York Jets training facility, the swagger of even the janitor was apparent. I have no idea if the pay was good or bad, but clearly the opportunity to be a part of the team was inspiring.

When the work itself is inspiring. Volunteer organizations are all about this. They balance people’s desire to accomplish a goal against monetary compensation. There are plenty of for-profits that work this way, too. Lots of artisan companies, or companies that work in a particular place or with a particular product (horses, for instance). People will give up some wages in order to do something they like or think is important.

These are clearly situations where loyalty is going to be part of the package. But what about for the rest of us, for the unglamorous companies with mundane work, for the bosses with feet of clay? We’re going to have to think of loyalty differently. We’re going to have to buy it — by which I mean providing a package of pay, benefits, and workplace atmosphere that’s good enough that our employees can’t easily find better pastures. And, frankly, when things go wrong, we’re not going to be able to count on loyalty to accomplish much, or for very long. Stop paying your workers, and see how long they stick around.

As a boss, I have had long periods of mismanaging my company. My employees have stayed with me, and I don’t think it’s because I’m particularly charismatic. The work is of an interesting nature, but after a few years of doing the same thing, how interesting is any job? I think that they still work for me because I have always paid them well (and on time). I believe that a sufficient-to-generous pay package is the best way to ensure that people stick around. It’s the responsibility of the boss to run the business so that you can afford this.

Unfortunately, for many years I was paying my people more than I could afford, and more than they could find elsewhere. Making that payroll was often excruciating. My employees were very happy with their paychecks, but the high costs were bleeding the company white. I cut wages by 20 percent in 2008 and partially restored them in 2009. Through all of that, I had no defections. My conclusion: I was paying more than I needed to.

There’s got to be a sweet spot in the middle where you pay enough to prevent defections but no more. Additional wages and benefits, beyond your employee’s next best choice, are paying extra for something you have already bought.

So to get back to the original question, as to whether higher pay makes employees more loyal, I would say: if you remove reasons for people to leave, you are more likely to have a stable workforce. As soon as the package of pay and benefits that you offer exceeds the next best alternative, what you have bought is functionally identical to loyalty.

How do the rest of you think about loyalty for small-business bosses? Is appealing to loyalty part of your management toolkit? Do you explicitly count on loyalty, as opposed to pay, to prevent turnover? And is there anyone who’s willing to admit that you don’t care about staff retention and find that keeping wages low, even with the cost of turnover, is more profitable than buying loyalty?

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