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Does A Higher Salary Lead To Increased Productivity?

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Does A Higher Salary Lead To Increased Productivity?

The living wage has been in the news in recent months with most of the main political parties making it clear that they see an improved minimum wage as a priority for their agenda. And it really does make sense – a higher wage does lead to increased productivity at the lower end of the market. But does this translate to improvements at the higher end of the wage scale – such as in the tax and financial sector?


A study released by the professional services firm KPMG this week has suggested that companies who fail to pay their employees a living wage are harming their own profitability,  rather than saving money – as they may expect. They cite a case study where cleaners had their wage increased from the minimum wage to the living wage and the result was significantly lower turnover of staff – saving the company £75,000 a year in recruitment costs.


This looks great for companies that employ low wage earners, but does it necessarily work for those who already pay high wages? There are many reasons why it might. The economic theory of the Efficiency Wage explains it clearly. It states that any worker who is paid a relatively higher wage than the market already bears is likely to feel more loyal to their employer. Additionally, they will work harder to maintain their position as they realise they may not get the same money elsewhere.


It is also true that a low wage can lead to a lack of motivation, lower morale and therefore lower levels of productivity. Even in the case of well paid roles, this is still true. People tend to judge their own remuneration on those of others doing a similar role. A highly qualified tax person is not going to compare themselves to the minimum wage, but to that of their colleagues. The results, however, are the same – a higher relative wage will encourage them.


As an employer you can expect the following productivity benefits from simply offering a higher than average salary to prospective employees:


  • Your staff members will be less likely to leave their role, lowering your costs of hiring over the long term. They will be more loyal and engaged.
  • You will attract highly qualified and experienced professionals who are wanting to take steps up the career ladder. The salary on offer will give them reason to choose your company over others. Highly qualified people bring you more business.
  • If staff are paid according to their abilities they will work harder and become more productive. They wish to set themselves apart, hopefully improving their wages further and holding on to their role.
  • Others who work for you will see that working hard really does result in more money – improving their productivity. Ensure that your increased wages are fair across the entire workforce to decrease any chance of resentment, as this could backfire.


Higher wages, are of course, only part of the package you should be offering your employees. Flexible work, good working conditions, bonuses and holidays all create a feeling of positivity within the workforce and as we have seen, this leads to improved profits for you.



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