Paying workers more than minimum wage can help reduce your payroll costs long term. Here’s how.

In today’s competitive market, few companies can hire at the federally (or locally) set minimum wage to attract talent. The aftershock of the pandemic has shifted the way we work and the way we hire. For many businesses, paying more than the minimum wage is the only way to attract talent when competing with larger companies. As more people reenter the workforce, market conditions will probably return to normal. The question for business then becomes whether to go back to the minimum wage, or offer more.
Payroll may be the single highest cost on your balance sheet. Wages, benefits, taxes, office amenities and other perks you provide to staff members add up to significant amounts. It’s estimated the average small and medium-sized business pays between 15 to 30% of its gross earnings in payroll. For businesses that are service-based, the cost can go up to 50%.
When you break down the cost of payroll, about 40% of that will go to benefits alone, like insurance, paid time off, etc. For businesses looking to cut costs, wages may seem like a quick, easy fix. But reducing the amount you pay today can have a ripple effect. Offering more than minimum wage can actually help reduce payroll costs, if you look at the long game.
Acquisition and retention costs
Hiring talent is an expensive necessity. The amount of resources exhausted in advertising costs, labor hours to screen and interview, and the costs to perform reference, background, and other tests add up quickly. Most companies consider recruitment costs are ones that connect to advertising or using a third-party hiring agency alone. The true cost of recruitment goes farther.
Factor in how many labor hours are put in the process, by recruiters, managers, and team members who may be involved in hiring. These staff members are taking time to schedule (and often reschedule) and meet with potential hires — sometimes several candidates for each vacancy. Their hourly wages need to be considered a cost-of-hiring.
Another cost is the lost productivity of a vacant position. The daily cost of vacancy (COV) is estimated at 1 to 3 times the employee’s annual salary. For an employee at minimum wage ($8.25), 40 hours per week, that’s a bit less than $20,000 per year. One percent COV equates to $200 per day in lost productivity or revenue generation for that earner. The longer it takes to hire, the more those costs add up.
On average, most businesses take 42 days to fill a vacancy, but with market conditions so challenging, it can take much longer. Forty days to fill that minimum wage position equates to $8,000 in lost productivity or revenue. If you took that $8,000 and divided it by 40 hours/52 weeks, you could add $3.85 per hour to your minimum wage positions and still break even.
It’s worth considering whether hiring at $12.10 per hour instead of $8.25 would make it easier to fill openings, easier to fill them more quickly and effectively, and easier to retain talent.
Morale boost
It’s human nature to return payment in kind. When staffers earn the minimum wage, they’re likely to put in minimum effort. When new and existing hires realize you’re willing to pay more for better talent and performance, they’re more likely to do more for your organization.
By offering more than the minimum, you’re going to attract and retain talent more loyal to your organization, more engaged at work, and more likely to recommend your company to friends and colleagues when you have a vacancy.
Reduced turnover is a direct result of high morale. On average (pre COVID-19 pandemic), employers lost almost 18% of staff to turnover every year. In July of 2021, the Bureau of Labor Statistics reported voluntary turnover at 25%. The cost to replace these workers is high. High morale equals higher retention, lowering costs for business.
By offering more than the minimum, you’re going to attract and retain talent more loyal to your organization, more engaged at work, and more likely to recommend your company to friends and colleagues when you have a vacancy.
Attracting talent — including talent that’s better qualified
Businesses that hire at more than the minimum may see more applicants for their positions and may be in a better position to be more selective when they hire. If you’re not getting any response to your minimum wage job posting, try upping the starting salary incrementally until you see the level of response and skill you hope to acquire.
Job seekers who have some experience or training are not looking to restart their career at the bottom, so if you’re looking for experienced staff you’ll need to post at a higher wage. Candidates with a degree are looking to land into a position that values their commitment to education. By offering the lowest possible salary, you may be able to hire for today, but you might face challenges finding talent worth training and developing for growth within the company.
Seeing your team as an investment
Your staff is as much an investment as any other asset the company holds, in many cases more so.
Yes, you can buy the cheapest materials, supplies, and equipment to keep your business moving: but how long before they break down or cause a hurricane of returns and dissatisfied customers? Your staff is as much an investment as any other asset the company holds, in many cases more so. You invest in a prime location, equipped with the best money can buy, then pay the very minimum to the people who deliver to your customers? It’s a short-term way to do business, when you consider how much of an impact staff has on your success.
Employees are your brand ambassadors: when they feel valued and appreciated, they’ll pass that good will along. They’ll take the extra step to assure a new client becomes a lifelong customer. They’ll represent your organization the way you want the public to view it. The staff you pay the least may do their job, but they’re not building your brand or your customer base.
Who earns minimum wage?
The minimum wage was once reserved for the most entry-level and unskilled jobs — often part-timers, high schoolers, and apprentices. As more jobs open in service and retail industries, the need to fill entry-level positions grew, while available talent began to shrink.
As talent pools reduced, wages remained stagnant. The federal government hasn’t increased the minimum wage since 2009, even though it’s been under assault nationally and locally for several years. No one anticipates earners at that level are making a “living wage” — one that can provide for themselves and their families. Balanced against business need to hire for relatively low-skilled positions, or those that require significant training, it’s been difficult to hire and retain talent from the lowest point of a wage scale that hasn’t changed in over a decade.
Finally, just because you can pay the minimum wage doesn’t mean you should. If you’re local, consider the impact you have on your community. The more you can pay, the easier it will be to hire — particularly locally — and the more you empower your community. The more you pay, the more your employees can spend in the area, including at your location. It’s long-range thinking that succeeds in the end: the more you commit to your business, workers, and community, the stronger they will all become.