I'm taking a labor economics class now - We talk a lot about how to manage people efficiently, align incentives and structure comp to achieve maximum efficiency. Really interesting stuff.
Yesterday we read and talked about Henry Ford. I'm obsessed with efficiency, systems and organization, so Ford (first to use an assembly line) holds a special place in my heart.
In Labor Economics, Ford is also known for doing something crazy.
In January of 1914, he upped his workers pay from an average of $2.35 a day to $5 a day. Nobody at the time understood why. He didn't need more workers (there were already lines of workers outside the factory), he didn't need better workers ( the jobs required little skill) and he wasn't a magnanimous man. People called him crazy.
Employee turnover per year shifted from 470% to 16%
Absenteeism dropped from 10% to 2.5%
Productivity per worker increased by btwn 40% and 70% (depending on measures)
Profits increased by 20%
Take it as you will. And don't be offended when I ask for a raise.
PROVIDED THIS CLARIFICATION TO READER VIA EMAIL:
Classical economic theory says that pay doesn't correlate with productivity (for unskilled jobs). The basic theory is that if nobody is monitoring unskilled laborers, they will work as little as possible without getting fired. After completing the minimum requirements, why would they work when they could be relaxing? They save energy by not working hard.
You can increase how hard they work in several ways - pay per task completed. Create tournaments to reward top performers. Pay for managers to watch workers. Punish for bad work. etc. These different methods have different implications on happiness and efficiency - thats what I've been studying and it's fascinating.
But if you only increase pay, workers work the same amount - just enough to avoid getting fired. If you increase pay (and nothing else) the likelihood of getting fired at a given effort level shouldn't change. And If a worker comes along and says "I'll work for less," you should hire her. For she will work just as hard.
The only time to increase pay is to attract better or more people - unnecessary for unskilled jobs.
Fords experiment (and later experiments) showed that increasing wages could increase productivity. There are a ton of ideas as two why.
The most widely accepted is called is called "Gift Exchange Theory." People think about any pay above the baseline pay as a gift. And in exchange for the gift of extra pay, they will give give a gift to the company (working harder). Other experiments have shown that physical and experiential gifts have larger effects on productivity than money gifts.
Another theory is that workers are now getting paid more than they should, so they fear being fired more. If they are laid off at fair pay, they can go to another factory and get the same pay. If they are overpaid, this isn't the case. Even though they don't really need to work harder, they become more paranoid and do work harder.