Are you looking to combat high turnover and retain key employees? We examine whether an efficiency wage system could help you.
For any company to thrive, competent employees with relevant skills and knowledge have to pool their brains and resources together to create strategies and drive initiatives. Past employees have brought the company to where it is today, and current and future employees are vital cogs and wheels in the company machinery who help to keep it running.
With Singapore's tight labour market and the increasing competition between companies, the fight to attract the most talented employees has never been fiercer. At times like these, the need to come up with a viable strategy to attract talents and promote the retention of skilled workers has never been greater.
Work for Reward
As an employer, one way to retain talented workers is to implement an efficiency wage compensation system. This means that you will pay your employees above the average market salary, thereby increasing employees' morale, productivity and efficiency and effectively giving them greater incentive to remain with the company.
With an attractive salary that is more than what they would be offered at most other companies, employees will be less likely to leave – or even think about leaving – their jobs. You, the employer, also stand to benefit from such a compensation system in the long term because you can save on expenses associated with repeatedly training replacement workers.
You Get to be More Selective
When your company becomes known for offering good remuneration, you'll naturally have the freedom to be more selective when it comes to hiring. This also bodes well for your long-term prospects as you gradually cultivate your reputation as a choice employer.
After all, when you have so many capable potential employees knocking at your door, you hardly have to worry about a manpower shortage. It can be immensely beneficial to be able to choose from a pool of already excellent workers and build up your team for the future. With competitive salaries, your company could stand to enjoy large productivity and efficiency gains in the long term from better workers.
The Dangers of an Efficiency Wage System
But the efficiency wage system may also give rise to the 'free-rider' effect. Free riders are employees who receive an efficiency wage from their company but still do not feel compelled to work harder. They may 'ride' on their higher-performing and more motivated co-workers who are determined to prove that they are worth their higher salary. Not only does this increase the burden on higher-performing employees, it could also result in an unsatisfactory return on your investment in your employees.
An efficiency wage compensation system also potentially leads to wage compression. Some companies may end up paying different salaries to workers of different efficiency levels even if they hold the same job positions. Furthermore, as more companies pay their employees above-average salaries in line with the efficiency wage compensation system, your company may face increased pressure to raise your employees' salaries yet again in order to remain an attractive choice for top talent in your industry.
In addition, not all companies can afford to pay above the market average. As an employer, you are understandably wary of implementing efficiency wages, which seem to promise uncertain gains. Instead, it's probably best to examine if it's within your means as an employer to offer your workers above-average compensation. There are other ways to provide your employees with incentives to stay, such as through miscellaneous benefits, developmental opportunities and a well-balanced work culture. Efficiency wages may be a great way to combat high turnover rates but are ultimately just a means to an end – encouraging employees to stay and grow with the company – and you need not feel pressured to jump onto the bandwagon.
