Why paying employees well leads to long-term success, according to workplace expert

The conventional wisdom in management often prioritizes cost-cutting, leading to a relentless pursuit of talent at the lowest possible price point.

However, organizational psychologist Adam Grant challenges this short-sighted approach, arguing that investing in employee compensation is not merely an expense, but a strategic imperative that pays dividends in the long run.

Grant contends that a commitment to paying employees well, even “extremely generously,” is a powerful mechanism for cultivating a happier, more motivated, and ultimately, more stable workforce.

“If you take a longer view, giving people a raise, and in particular, paying them well—some would even say paying them extremely generously—is an investment in motivation and retention,” Grant tells Fortune.

The pendulum swings, but principles remain

The labor market has undergone a dramatic transformation in recent years.

After the pandemic totally upended the jobs market and put bargaining power firmly in the hands of employees, the pendulum has now swung firmly back to employers.

In August of 2022, job switchers earned pay increases of 8.4% compared to 5.6% for people who stayed in their roles, according to federal data.

But that difference is now almost negligible.

Job switchers received around a 4.8% pay increase in January and February of this year, compared to job stayers who came away with a 4.6% gain.

While the shift in bargaining power might tempt some employers to suppress wages, Grant cautions against this short-sighted approach.

“When organizations pay on the top end of the market range, they end up with unusual loyalty, because people know that they can’t easily replicate the salary that they’re getting elsewhere,” he says.

More than just money: communicating value

Ultimately, Grant emphasizes that decent pay is about more than just the numbers on a paycheck.

It’s a tangible demonstration of a company’s values and its commitment to its employees.

It shows loyalty to the employees, and shows that their contributions are valued.

“The power of raising someone’s salary lies in communicating to them: ‘Hey, you’re really important to us. We don’t want to lose you. We want to make sure that you can support your family and lead the lifestyle that you dream of,” he says.

By treating employees as valuable assets, companies can foster a culture of loyalty, engagement, and long-term commitment, ultimately driving sustainable success.

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