Paying Employees More Is Smart Business for Some

Paying an employee more than market value is traditionally considered bad business. But, increasingly, some businesses are experimenting with giving a little extra to employees and it appears to be a smart investment.

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(Photo Credit: Olle Svensson/Flickr)

One San Diego restaurant has gone the last six years declining tips from customers -- instead, adding an 18 percent service fee to the bill -- and are paying servers and kitchen workers more.

How has the experiment worked?

"When we switched from tipping to a service charge, our food improved, probably because our cooks were being paid more and didn't feel taken for granted," wrote restaurant owner Jay Porter in Slate. "In turn, business improved, and within a couple of months, our server team was making more money than it had under the tipped system."

In Seattle, probably the city's most well-known restaurant owner, Tom Douglas, recently announced he was raising kitchen workers' pay to $15 an hour from $12.

Eventually, Douglas hopes other restaurants, in an effort to stay competitive, will be forced to raise kitchen workers salaries as well.

"So if by raising what I pay I can hire away some of their better employees, over time maybe they’ll have to pay closer to what I pay," Douglas told the Seattle Times. "Same with other successful restaurants. That's how it spreads."

Not just in the restaurant business, but some tech startups are also investing heavily in talent.

David Cummings, who sold his marketing startup Pardot for $100 million last year, wrote in the Wall Street Journal that the by investing in an "awesome company culture" he was able to attract the best people, which was key to Pardot's success.

Some of the perks offered to employees included four hours of housecleaning per month, a full-time masseuse on staff, full health, dental, short-term disability and long-term disability paid for by the company, catered breakfast five days a week, and a "be reasonable" vacation time policy.

As a result, Pardot had an extremely low turnover rate, an average of less than two employees per year with a company of about 100 employees.

"Corporate culture is the only sustainable competitive advantage completely within the control of the entrepreneur," Cummings wrote.

Keeping turnover rate is low is the biggest incentive for executives to invest heavily in employees. If a worker leaves, it costs nearly twice an employee's salary to find and train a replacement, plus, a high turnover rate hurts team morale, according to the Wall Street Journal.

One of the biggest economic problems in the United States is wage stagnation, but as the economy slowly improves and companies are increasingly competing for talented workers, some businesses might calculate that paying more isn't just good for their employees -- it's also good for them.

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