Why It Pays to Pay Employees More

(Photo: Peter)

We blogged a while back about how some retail firms succeed by hiring more, not fewer, floor employees, and by treating them particularly well. Among the examples: Trader Joe’s and Whole Foods; among the counterexamples: Michael’s.

This prompted an e-mail from Hal Varian, Google’s chief economist. (If you don’t know of Hal you should, as he’s an impressive and fascinating guy — check out the Q&A he did here a few years back.) His e-mail reads:

Saw your piece about Trader Joe’s et al.  Here’s one reason to pay people more than their market wage (from my textbook):

Gabor Varszegi has made millions by providing high-quality service in his photo developing shops in Budapest. (See Steven Greenhouse, “A New Formula in Hungary: Speed Service and Grow Rich,” New York Times, June 5, 1990, A1.)

Varszegi says that he got his start as a businessman in the mid-sixties by playing bass guitar and managing a rock group. “Back then,” he says, “the only private businessmen in Eastern Europe were rock musicians.” He introduced one-hour film developing to Hungary in 1985; the next best alternative to his one-hour developing shops was the state-run agency that took one month.

Varszegi follows two rules in labor relations: he never hires anyone who worked under Communism, and he pays his workers four times the market wage.  This makes perfect sense in light of the above remarks about monitoring costs: there are very few employees per store and monitoring their behavior is very costly.  If there were only a small penalty to being fired, there would be great temptation to slack off. By paying the workers much more than they could get elsewhere, Varszegi makes it very costly for them to be fired — and reduces his monitoring costs significantly.

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  1. Josh says:

    It does make sense that making a larger investment in employees creates a larger payout. True, it does present more of a risk, but all smart investment have risk. This particular investment can be a little more predictable. You know that if you train employees more so, and with a quality education, they will know how to be more productive, and will have the monetary incentive to pursue productivity.

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  2. Joe says:

    Trader Joe’s used to be a great place to work. But now the children of the owner have inherited the business and are in the process of getting rid of employees. And they’re doing it in the cruel way possible. To be considered for scheduled hours, you have to declare “open availability” from 3am to 10pm Monday-Sunday. And that doesn’t guarantee you’ll get hours. You might work 3am to 5am one day, 12 noon to 6pm the next, 5am to 1pm after that, etc. And if you can’t get enough hours to pay your bills and tell them that you’ve taken another job then you get dropped from the schedule (effectively fired) because you’re no longer available during certain periods.

    Long term employees who’ve relied on Trader Joes to pay their bills are now losing their home, going into debt, and scrambling to find other jobs. Also, many, many employees are getting hours cut to the point of being dropped off of insurance. The company brags in the social media about great pay and benefits, and this is to get people to apply. But what good it $11-$15 and hour if you can’t get the hours, and what good is the great insurance if you can’t get it?

    The only people who get full hours are the Mates (assistant managers) and Merchants (supervisors). Being a loyal employee who’s getting screwed, it drives me nuts when customers come in and say “You guys give such great customer service! They must treat you guys really well. This must be a great place to work!”

    Instead of seeing all these glowing reviews about the company on the internet, I wish someone would do an expose about how they’re cutting their workforce to people who only work 2-3 days a week and are nearly going homeless.

    All employees got a letter from the CEO explaining that the pay and benefits cuts are because of Obamacare.

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