A Surprising Benefit of Low Pay in Family Businesses

David Ransburg
David Ransburg

I recently met with a family business owner who is quite open about the fact that he consistently pays his employees at a below-market rate. Given that he also makes great efforts to ensure that his company delivered the very highest level of quality, I questioned him about his low pay strategy.

I thought – somewhat naively, it would now appear – that higher quality demanded higher employee wages. He believed that low pay helped him to find the right employees for his company – those who would be dedicated, hard working, and have a strong belief in the company’s vision and mission. In other words, offering low pay – and having a reputation for doing so – provided his company with employees who weren’t working solely for the money. And, he believed, an employee who works for reasons other than just the money is an employee who will ultimately deliver higher quality.

While I remained somewhat skeptical, his argument did move me slightly because it reminded me of the common refrain about the low pay received by teachers. Even though all agree that teachers are so important, we, as a society, want them to be passionate about their jobs and to see their work as meaningful – not to do it for the money alone.

Now, there’s some research that further supports this line of thinking. The Institute for the Study of Labor (IZA) in Bonn found that relatively few workers are motivated by their organization’s mission, BUT those who are so motivated provide substantially higher effort AND receive lower pay. Granted, higher effort does not guarantee higher quality… but, I would suggest that it’s a good start.

Have you found a similar benefit of low pay in your family business? Or, are there other surprising benefits of low pay that you’ve seen?

5 thoughts on “A Surprising Benefit of Low Pay in Family Businesses”

  1. Interesting rationalization. Low pay either attracts dedication or desperation. At the point of the decision it may be difficult to determine which is at play.

    I’m more persuaded when people (or societies) simply admit that they choose not to value certain work highly enough to pay more for that work.

  2. I can see why this gentleman might believe this reasoning, but I disagree. In our current economy, with the middle class disappearing, many of us are still struggling to make ends meet or surviving on debt because we do not make incomes that allow us to make larger purchases in cash. Out of college, I admittedly made some bad job decisions, but I was also left challenged to find a job that paid me a comfortable living wage due to having a broad degree (English) that didn’t lend itself to one particular job. When I finally obtained a job recently that paid me more than I had ever been paid (though still in the middle class range that leaves me living mostly on debt), I was so incredibly grateful that my motivation to work hard for my employer has been consistent and high. Additionally, he gives his employees a percentage of ownership in the company, something he has read much about other corporations doing, so that we are doubly motivated to see it succeed. There are some industries in which people accept low pay for the internal satisfaction of what they do. But for most of us, our circumstances and our economy mean that we cannot. I can personally attest to the fact that the higher than average pay for my position has left me MORE motivated than lower pay ever would.

  3. Thanks for your comment, Emanuele. I’m delighted to hear that my case is not the only instance of this phenomena. The company I mentioned does, in fact, operate in a low tech/growth/complexity industry: commercial real estate and construction.

    What is it, in your opinion, that makes this approach less relevant for high tech/growth/complexity industries?

    Best,
    David

  4. Hello I am a management consultant in Italy and I have a direct experience of a company where employees are paid less than the market average but the financial results are higher than the market average. In addition these employees work more than the market average and the turnover is less than the market average. This has to do with outstanding skills of the founder in selecting and retaining people. I agree that the mentioned formula works. But in my opinion this formula applies well in low tech low growth low complexity business. I wonder in which industry operates the mentioned case.

    Best Regards
    Emanuele Giangreco Biancheri
    Best Regards

Leave a Reply

Your email address will not be published.