Small Business Explained: If Your Workers Love You, They Won’t Mind Not Getting Money

Cabinetmaking-company owner Paul Downs, who blogs for the New York Times as a representative of the American small businessman, has a meditation today on the

nature of loyalty


[H]ow much pay is required to inspire real effort? Or, put another way, can feelings of loyalty be substituted for monetary compensation?

In his line of work, Downs writes, he can’t count on charisma, prestige, or inspiration to keep people making cabinets. So he has to pay the workers enough that they won’t leave him.

This is, according to Downs, a calculation that he mismanaged:

Unfortunately, for many years I was paying my people more than I could afford, and more than they could find elsewhere. Making that payroll was often excruciating. My employees were very happy with their paychecks, but the high costs were bleeding the company white. I cut wages by 20 percent in 2008 and partially restored them in 2009. Through all of that, I had no defections. My conclusion: I was paying more than I needed to.

There’s got to be a sweet spot in the middle where you pay enough to prevent defections but no more. Additional wages and benefits, beyond your employee’s next best choice, are paying extra for something you have already bought.

…As soon as the package of pay and benefits that you offer exceeds the next best alternative, what you have bought is functionally identical to loyalty.

In 2008, you say? Well, there was sure a

lot of opportunity

for, cough,


then. Rationalizing. Rationing. Maybe Downs’ workers looked in their hearts and recognized that they had been 20 percent overpaid till then. Or maybe, given the prevailing

next best alternative

, they decided they preferred being 20 percent screwed out of their livelihood over being 100 percent screwed out of their livelihood. “Functionally identical to loyalty,” in this context, looks functionally identical to hopelessness.