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Why the “Henry Ford Approach” to Compensation Still Works Today

There’s no more direct way to invest in your business than to pay your employees well. Henry Ford knew this. Early on, the Ford Motor Company was struggling to keep employees and had an extremely high turnover rate. In 1913, Ford hired more than 52,000 men to keep a workforce of only 14,000. To address the turnover issue, Henry Ford upped his employees’ pay from $2.25 a day to $5.00 day, twice the average wage for automobile makers in 1914.

Editor’s note: This piece was written by Hedge Stahm (Sr. Segment Manager, PayScale) and Jingcong Zhao (Content Marketing Manager, PayScale). 

There’s no more direct way to invest in your business than by paying your employees well.  

Henry Ford knew this. Early on, the Ford Motor Company was struggling to keep employees and had an extremely high turnover rate. In 1913, Ford hired more than 52,000 men to keep a workforce of only 14,000.

To address the turnover issue, Henry Ford upped his employees’ pay from $2.25 a day to $5.00 day, twice the average wage for automobile makers in 1914. In addition, he reduced the work day for his workforce from 9 hours to 8 hours, a significant departure from the 60-hour work week that was typical in American manufacturing.

At the time, this move was considered “crazy”; Ford was raising wages at the very time when other auto manufacturers were trying to reduce wages to the lowest acceptable standard!

When asked why Ford chose to raise wages so dramatically, he said it’s because higher wages would drive higher quality work from all his employees. To be precise, he felt that higher wages were necessary to retain workers who could handle the relentless pressure of the assembly line.   

When asked why Ford chose to raise wages so dramatically, he said it’s because higher wages would drive higher quality work from all his employees. Click To Tweet

Once wages increased to $5 per day, productivity surged. Ford doubled the company’s profits in under two years.

What It Means to Pay like Henry Ford

Ford_classic_car

Henry Ford recognized that in order to build an innovative business, one that makes products the world has never seen before, he needed a compensation plan that would attract top-notch employees who possessed specialized skills and a high dose of grit. To get these people, he needed to send the message that Ford was the place where talent would be recognized and handsomely rewarded.

We’re not suggesting that you double the salary of your typical employee, or that you go into a bidding war with your competition, but there are lessons businesses can learn from doing things the Ford way. Ford had defied the compensation “best practices” of his day: he recognized that he needed a different, bolder compensation strategy in order to get “higher caliber” employees to work for him. Additionally, Ford communicated to make sure that his workers knew that they were paid at the top of the market and why he chose to pay the way he did. His employees recognized how extraordinary their compensation package really was and talked about their employment experiences with others, further helping him attract talent.   

The way that Ford played the compensation game is especially relevant in today’s climate, when businesses are being disrupted at an unprecedented pace.

In the past, the US economy was centered around production and manufacturing. Then, in the late 1960s and early 1970s, business started shifting to more automated production, using computers and information technology. By the mid 2000s we started to see the blending of technology and devices. Now, we are living in what many are calling the “Internet of Things” era.  In this age of tech-gadget fusion, you can use your cell phone to turn on your laundry dryer, or ask Amazon’s Alexa device to turn on the thermostat in your home.

While you might love ordering groceries or a Lyft through Alexa, the downside of the innovation is that it’s led to the contraction and even the complete disappearance of long-established industries (Blockbuster is a prime example). Furthermore, technology has made it easier for upstarts to enter your market and for existing competitors to replicate your products. And while your competitors are putting pressure on your business, your top employees — those with hot skills — have more options for employment than ever before. 

Today’s businesses are no longer competing on the basis of who controls the means of production. Instead, it’s about who can attract the best talent. As Klaus Schwab, Founder and Executive Chairman of the World Economic Forum has said “I am convinced of one thing—that in the future, talent, more than capital, will represent the critical factor of production.”

Today’s businesses are no longer competing on the basis of who controls the means of production. Instead, it’s about who can attract the best talent.Click To Tweet

How to play the talent game

Businesses today have to ask themselves the question, “Who are we competing with for talent?”   

What we see every day here at PayScale is that multiple industries are now competing for a limited number of workers with certain skills. When we speak with manufacturing companies about whom they compete with for talent, they tell us that they aren’t just looking for machine operators and production workers; they’re also looking for software developers and other high-tech talent. They are now competing for talent with not just other manufacturers, but also with technology firms like Google, Apple, Facebook and other technology vendors from across the country.

What we find is that organizations who are able to attract top talent are focusing more on who they are as company rather than what they do. They’ve built a strong, recognizable employer brand. They view compensation as a strategic business lever and and they know how their compensation strategy supports their business strategy.

Cultivate a Strong Pay Brand

Top performing companies today are building their pay brand with intention. They’re thinking deliberately about what they want to reward and why. And they’re allocating their compensation budget in a way that reinforces their values. Further, these companies are clearly communicating their comp philosophy and strategy to employees, so that employees feel that they’re being paid fairly and competitively. Some companies, like Whole Foods, have used salary transparency to create a competitive differentiation, and others like Salesforce have used gender pay equity for the same reason.

One of the important details in Henry Ford’ story is that Ford had rapidly iterated on his compensation plan during those years. He didn’t immediately double wages to $5 dollar an hour; instead, he raised wages gradually in $25-cents increments for months before finally settling on $5 per hour. He continued to adjust compensation and closely monitored how pay impacted morale and turnover.

Given that workers today have more mobility than ever before, it’s important that you review your compensation plan frequently and treat comp as an ongoing dialogue with your employees. The market value of certain roles can shift more than 10 percent in a 12-month period. For example, when we looked at salary data from PayScale’s online salary survey, we found that software engineers who know the programming framework React.js saw a 13.3 percent boost in pay over the past year compared to software engineers who didn’t have this skill.

For this reason, we recommend you identify your most critical roles and review market data for these roles on a quarterly basis. Compensation platforms like PayScale Insight Lab can help you easily identify the key salary trends in your market, and help you price your jobs using the freshest data. 

Need some help determining if you’re paying workers competitively and what the market rate for your roles is? Schedule a demo with PayScale.

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