Question

Explain what is the efficiency wage theory. List and explain what could be the implication for a company that would apply this theory.

Answer 1

Introduction

In the modern times, gone are the days, when companies could deal with their employees as they liked. This was a happening of the early industrial revolution, in which people were just considered to be a cost instead of their realization as contributing assets to a company.

With modern advancements, and the growth of laws to protect labor forces coming into play. This soon changed and people were seen in positive light. Concepts such as Human Resource Management and Labor Training and development led to rapid use of governance resources for increased productivity.

Case Specifics:-

Explain what is the efficiency wage theory?

The efficiency wage theory was built around the central idea, that higher employee satisfaction would guarantee higher returns to a firm. The theory advocated that people working in an organization should be paid wages which are relatively higher than the industry standards. This in turn, would result in higher satisfaction and efficiency of the workforce, lower employee turnover & healthier employees.

The theory advocated that as long as the benefits outweighed the costs of such an activity, the firm would largely benefit and have higher profits in the long run.

The details and the implications for a company which would apply this theory are as explained. It is undeniable, that the cost of operations for any firm would increase if it started paying its employees higher than the competition, however the effects would also be positive and are as explained

List and explain what could be the implication for a company that would apply this theory.

For a company which is ready to pay people higher salaries than industry standards, the following key factors are likely to occur.

Increased Efficiency at Workplace:-

It is easy to understand the essential link between fair salaries and employee motivation and efficiency. An employee then, who is paid higher in contrast to the industry standards would stand by the company whenever required. The resultant would be increased efficiency of the person at workplace. This would translate on the larger scale to a company which works better and sees more positive results for itself.

The employees would be keen at increasing their effort for an organization which pays higher than industry standards. This can result in new innovations and techniques which can help the firm in gaining profit way higher than the costs of such operations.

Decrease in Employee Turnover Ratio:-

One of the biggest reasons for companies to have higher costs is because they train people which tend to leave within a year or so of work. This does not happen with companies which take care of their employees. The theory correctly depicts that a higher paid employee is less likely to leave the organization and thus the employee turnover would be significantly lower as the industry would not be able to pay as much as the company is currently paying for all designations and role types.

Thus paying people more, would result in reduced costs in certain sectors and areas for the company as per the theory.

Increase in Employee Quality and Elimination of Low Quality Workers:-

The theory advocates that low quality workers would be the only ones which would chose a competitor over your company. This would happen because higher quality people would always want to work for a company that pays better. This would result in self elimination of those who are low skilled since they would find it easier to get a job in a company which pays lower.

This would mean greater efficiency for the company as the theory correctly advocates.

Conclusion:-

In real life, we do see this phenomenon happening with bigger brand names which tend to pay people higher for simple skills. This ensures that the company is able to earn higher profits for themselves even when some additional costs may apply. Companies over the years have realized that if you can keep an employee happy, they are more likely to perform higher than others respectively.

Please feel free to ask your doubts in the comments section.