108 years ago, Ford doubled workers’ wages overnight: the business case for higher wages

Countless Studies Show Employee Compensation Is Important… But Not That important.

As Gallup CEO Jim Clifton says, referring to the ongoing… State of the American Workplace study:

The single most important decision you make in your job—more important than anything else—is who you call a manager. If you call the wrong person a manager, nothing will fix that bad decision.

No compensation, no benefits – nothing.

In many cases that is probably true. If I’m making $40,000 a year, my boss really doesn’t like me, and another company offers me $42,000…yes, I’m probably leaving.

The same goes if I don’t like the nature of the work I do, or if I feel like there are few opportunities to get ahead. In that case, even a small salary increase can be enough to lure me away. (That’s one of the main reasons for the large layoffs; when employment is full, incremental improvements in pay or working conditions are fairly easy to find.)

But what happens if the wage difference is significant instead of increasing?

That’s what Henry Ford decided to find out when he was confronted with his own version of the Great Resignation.

By 1912, Ford had doubled production by doubling the company’s workforce. By 1913, with its moving assembly line systems fully installed, the same number of employees produced twice as many cars. The 12.5 hours it took to build a car was now just 93 minutes.

The problem was that transforming productivity also changed the nature of a line worker’s job. Automation and optimization quickly turned individual crafts into a mind-numbing repetition. Workers did one thing — one physically demanding thing — over and over.

And soon they stopped en masse: Ford’s annual sales figure reached 370 percent. (Imagine crossing three employees for each job over the course of a year.)

So Ford took a radical step. Instead of raising the wage rate by 10 or even 20 percent, base rate doubles from $2.50 per day to $5 per day — while also reducing the standard working day from 9 to 8 hours. (While working fewer hours for more money was great for employees, it also allowed Ford to turn a two-shift into a three-shift to dramatically increase capacity, a real win-win for employer and employees.)

What happened? Within a year, labor turnover fell from 370 to 16 percent. Transhipment increased by more than 40 percent. The addition of a third shift — whose jobs were easy to fill because potential workers flocked to Michigan in hopes of getting well-paid work — dramatically increased overall production.

Although labor costs for factory workers at Ford had doubled, the cost savings from massive productivity improvements and employee retention were at least partly passed on to customers: In 1919, a Model T car sold for $800 in 1910 cost only $350.

The combination of higher wages and lower prices made car ownership possible for thousands of employees, and for the first time, the average Ford employee could also be a customer.

To paraphrase Ford, “We believe in making 20,000 employees prosperous and happy rather than making just a few of our executives millionaires.” (On the other hand, there were obligations: Employees had to abstain from alcohol, not physically abuse their families, not take in boarders, keep their houses clean, and contribute regularly to a savings account. So yes: Henry Ford’s “largesse” certainly came with conditions.)

The result? Lower prices broadened the company’s customer base, making Ford’s low-margin, high-volume strategy even more effective.

Obviously, it’s not that easy to raise employee wages overnight. Without the cost savings associated with assembly line efficiency, doubling wages would have been financially impossible for Ford.

That’s the point: While profits clearly matter, what you do with those profits can matter even more.

You may decide that all your employees can work remotely and you can save on office and infrastructure to increase wages. Perhaps you work hard to automate repetitive processes, pass those savings on to customers to broaden your customer base, and achieve economies of scale that generate greater profits that can be used to pay your employees more.

In the long run, higher pay can lead to better retention rates. To attract even more talented employees. For more productivity, efficiency and cost control. (That’s certainly what Microsoft hopes; just the company) announced a substantial increase in workers’ compensation

Most entrepreneurs plan to pay their employees more one day when their business is finally thriving.

But perhaps one way to build a thriving business is to focus on finding ways to pay your employees more today.

The opinions expressed here by businesstraverse.com columnists are their own, not businesstraverse.com’s.