In Tough Times, Raise Worker Pay?

At a time of economic uncertainty and financial stress, it’s absolutely essential to squeeze every penny out of every cost to maximize profits to grow your business. It’s a plain, simple imperative. Or is it? Ask Henry Ford.

A recent article by Henry Blodget on the Daily Finance web site described how Ford, on the eve of World War I, doubled his employees’ salaries. Legend has it that the pay increase was to give his employees the money they needed to buy Ford’s automobiles, thereby ensuring the success of his company. That sounds good, even if it doesn’t make complete economic sense. If Ford was selling automobiles only to his own employees, he would quickly have gone out of business. In order to pay the higher salaries, Ford must have been already selling enough automobiles to cover the increased labor costs. Brilliant as he was, Ford couldn’t mass-produce money just to give it to his employees to buy more automobiles. And even if 100 percent of the pay increases went toward purchasing Ford products, that wouldn’t have been enough to sustain normal production, much less provide profits to enable the company to prosper and grow.

Was Ford a fool? Likely, not.

The ethos of today’s market is to get the “best” talent for the absolute lowest price, not exactly Ford’s model. Is there a lesson here for today’s users of temporary staff?

Let’s look at the motive assigned to Ford: to enable his workers to buy his products. Smart, or Not Smart?

On a micro scale, it seems to make sense to cut costs aggressively. If Ford could have cut his employees’ salaries and continued to sell automobiles and make profits, some would make a strong business argument that he was wrong not to have done so. But on a macro scale, it becomes apparent quickly that an economy where wages are constantly driven down is a shrinking economy. If everyone earns less, there’s less to spend; and where there’s less to spend, there are fewer opportunities to sell. Fewer sales, lower profits. Lower profits, fewer jobs and lower wages. The cycle is obvious. Equally obvious, for most people (the 99 percent, if you will) more money in their pockets means more to spend, adding to economic growth. From that perspective, it’s apparent that Ford’s generosity helped not just his own employees, but the economy as a whole. Ford didn’t just enable his own employees to buy more automobiles, he helped his employees’ grocers and tailors, milkmen, butchers and merchants of all types to grow their businesses and generate more sales for Ford. It’s such a simple model, isn’t it?

However, the Daily Finance article suggests that the real reason Ford increased his employees’ pay wasn’t something as crass as a sales gimmick as it was a recognition of Ford’s need to retain and reward the employees that were making his business a success. The article points out that, even with a surplus of available labor, Ford was losing employees to competitors, or to simple attrition. The costs for finding and training labor were so high that it made more economic sense for Ford to reward his employees and earn their loyalty than to pay the ongoing high costs of recruitment and training.

What is your primary expectation from your MSP? Do you see it merely as a tool to drive down costs and to engage workers as commodities? Or is it a vehicle to obtain the best talent at the best – but fair – price? Which is more important: cost savings or a content and engaged workforce? What is the value to you of winning the loyalty of your contingent workers?

The Lady or the Tiger is a classic story of someone forced into making a difficult choice. For the star-crossed princess, neither choice could lead to a happy ending. For Ford, whatever his motive, the results were positive. In today’s business environment, there are those who argue persuasively for the tiger of reduced spending and lower wages, and others who look with equal fervor for the lady of a more engaged and satisfied workforce.

Which would you choose?


This post was originally published in Contingent Workforce Strategies 3.0.

Frank Lyons

Frank Lyons
Frank Lyons is an attorney and senior legal associate with Brightfield Strategies LLC, which helps Fortune 500 companies with contingent workforce strategy initiatives such as contract review and development, program design, VMS/MSP sourcing and selection, and global program compliance.

Frank Lyons

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