Paying More

Justin Fox, editorial director of the Harvard Business Review Group and author of The Myth of the Rational Markethas written an interesting article offering an argument for higher wages.  A fan of the Austrian School of Economics, I do not find his case that compelling, but his points cannot be summarily dismissed.

I agree that wages are not determined by a “rational market.”  HR pros and compensation experts well know that market rates are but a factor in the equation.  Similarly, I agree that wages have a lot to do with the culture of the enterprise involved.  He did not, but I will, throw in: 1) The relative balance of the other rewards for work; 2) the means of the company to pay; 3) internal pay equality issues; and 4) the negotiation prowess of the candidate.

I take strongest issue, however, with his lack of treatment of pay as a motivator and his version of Henry Ford’s decision to more than double the wages of his workers.

Pay has been proven time and again to be a lousy motivator (with the possible exception of sales roles) and has never makes it higher than fifth out of ten top values of work in national surveys.  Worse, any “bump” in performance or outputs an employer gets following a pay raise typically fades within thirty days as the worker reverts to prior norm.

True, Ford did want his workers to buy the cars they made, and did want to lower turnover to cut into training costs and curtail the performance lag experienced by new employees on the line.  But most importantly it represented sales and marketing expenses.

Ford’s problem was a business model based on volume sales to the masses.  Cars prior to the Model T were primarily hand built by trade and craftsmen, were extraordinarily expensive, thus only the wealthy and criminals could afford them.  Radio was the great mass media of the day, but was limited in value to Ford because his product had to be seen to be believed.

He found himself in the worst of straights: a great product for a market that did not believe they could or should ever own it, had virtually no where to drive it easily (roads of the day were designed for horse-drawn vehicles), no network of gas stations. and no interstates.  The mental model of the working class of the day had to be broken if Ford was to prevail.

This cannot be understated.  Today’s product access equality was unknown in Ford’s time (e.g. the person in the grocery line in front of me the other day paying for food with an EBT card while talking on a newer and better phone than I have).  Workers back then didn’t even know anyone who owned a car.  Ford factory workers driving home cars and parking them in front of their houses shattered the mental model of the working class toward cars and sold more vehicles than radio or print advertising could have.  The move was flat out brilliant.

Ford also had the sense to give the worker the car with a small down-payment, collecting the balance via payroll deduction. In many cases, worker’s weekly income stayed relatively flat for years even though their pay increased.  Mr. Fox misses this critical distinction and instead assumes workers had more money and spread it around lifting all boats.  Wishful Keynesian thinking, Hayek would say.