How Salary Impacts Employee Performance

A salary is more than an amount on a paycheck – here’s how it matters more than you may think.

What motivates you to be productive at work? Is it the prospect of success? The desire to help others?

Regardless of your answer, there’s a good chance that money plays a role. Studies have proven time and again that higher wages can increase productivity and consequently increase a company’s profits.

Employees are more likely to work harder to keep their position when their employer pays above-market wages. This is known as the efficiency-wage theory: higher wages increase worker morale and productivity because employees feel appreciated and want to keep their position.

Even slight changes in salary can lead to major changes in productivity. A Harvard study looked at the wages and productivity of warehouse workers of an anonymous Fortune 500 company. They found that only a $1 hourly pay increase led workers to move a noticeably higher amount of boxes. This same dollar-increase lowered the quit rate by a staggering 19%, significantly reducing employee turnover.

Given the increased productivity, higher employee morale and the cost savings from not having to hire and train new employees, companies and workers alike benefit greatly from increased wages.

Unfortunately, these benefits go unnoticed by many companies. According to a study by the United Way of the National Capital Area, there is a great imbalance of salaries between men and women and the pay of Black, Indigenous and People of Color (BIPOC) citizens compared to white people nation-wide. These disparities have far-reaching effects on quality of life, housing and more.

White people earn, on average, 26.87% more than BIPOC individuals, and this discrepancy is nearly four times larger in Washington D.C., with an astonishing pay disparity of 91%. Baton Rouge, Louisiana is the least equitable city on the basis of gender, with a wage gap of nearly 50%.

Employees in areas with high rates of income inequality are not the only ones that are affected. With lower wages, it can be assumed that employees are not as productive, and therefore, that the company does not see increased profits. It’s probable that the cost consequences of lower pay are more harmful than the amount of money saved.

The bottom line is this: employees are more motivated, efficient, and loyal to their job when paid well. Though the company may spend more of its budget on employee salaries, the benefits from higher wages are extensive and are certain to offset this financial loss.

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