My dad used to say, “People work for money. If you want loyalty, get a dog.” He wasn’t trying to be cynical – he was trying to give me advice. (For the record, my dad still loves to give me advice.) As a teenager, I was working a boring job that was located many miles away from my house. I was offered a job at a higher paying wage that was closer to where I lived, so it should have been a no-brainer to accept the closer, more interesting job. While I felt a degree of loyalty towards my employer, even my teenaged brain realized dad was right. I worked hard, I was focused, but I wasn’t being paid comparable wages. In economics, this is referred to as the theory of Efficiency Wages. So here’s how Efficiency Wages works. If you have a terrific employee, you should pay them not only what they are worth, you should pay them as much as you possibly can, and more. You should pay then what they are worth to your company. Why? Because employees work for money. Sure, there are intrinsic motivators, and there are people who would do their jobs for nothing. (Those select, lucky few are usually independently wealthy. The rest of us need to earn a living.) Really terrific, experienced, hard-working employees are exponentially worth more than unreliable, inexperienced, problem people. They work hard, and the higher wages results in much higher productivity. It is time consuming and difficult to find a truly great employee, so when you do, as a company or as a boss, do your very best to keep them with you. The phrase “you get what you pay for” has never been more true than with hiring talented employees. Some of the best advice I’ve ever heard was to “hire the best people you can find, and pay them as much as you can” to truly build your business. They will perform tasks that you cannot, and they will have ideas that you need. If you don’t adequately compensate your employees, even if they personally like you, they will be forced, out of economic necessity and opportunity, to accept higher paying positions elsewhere. Then you as an owner or manager are suddenly spending a majority of your workday on personnel issues, as you try to replace your superstars. In economics this is called the Search Activity. It is the opportunity cost, the time and resources that it takes to find, screen, train, and hire new people. If a new hire doesn’t work out, you have three choices; you can fire them, encourage them to leave, or find another place in the organization that will take them. All of those options are time-consuming and painful. Then you have to repeat the hiring process again. The firm suffers a loss of productivity while the job is vacant or in transition. You may have to repeat the replacement process a few times, and chances are, you are not going to find someone who can do what your superstar did. Many managers and owners fail to realize that the theory of Efficiency Wages, or the cost of not paying employees well will actually cost you more in the long run. Conclusion: People will work where they can best realize their highest potential, where they are paid well, and feel challenged. So managers, your employees may adore you as a person, and you may be easy to work for, but they will ultimately walk away if you are not properly compensating them. People work for money. Find your nearest humane society if you want unconditional loyalty!

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