What is an Efficiency Wage?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 September 2019
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An efficiency wage is a wage that is extended to an employee as a means of motivating that employee to remain with the company, rather than seek opportunities with competitors or even in another industry altogether. Along with increasing the chances of keeping a valued employee, the extension of this type of wage can also serve as the impetus for increasing the general productivity of the employee. This is because the employee feels valued by the employer and is willing to put forth additional effort in response to that perception.

One of the characteristics of an efficiency wage is that the figure is not based solely on the current standards set within the industry. Instead, the wage serves as a means of meeting and exceeding that current standard. The increased wages help to attract more qualified employees, as well as provide them with a reason to remain with the company for an extended period of time. This is in contrast to the idea of setting wages based on the supply of potential employees in the area, and the demand for employees that prevails locally.


While there are many different theories about the benefits of using an efficiency wage strategy, there are four key advantages that employers seek to obtain with this model. The first has to do with increasing productivity. Here, the idea is that employees who are well-compensated and feel that they are important to the company will expend more efforts in carrying out their job responsibilities. In contrast, employees who feel unappreciated are likely to put forth the minimum effort required to maintain their positions, and no more. Over time, this mindset has a negative effect on the profitability of the company, possibly to the point of causing the business to fail.

Another advantage of the efficiency wage has to do with preventing high amounts of turnover in the workplace. Companies expend time and resources training new employees whenever a position becomes vacant and must be filled. By providing existing employees with incentives to remain, these costs are kept to a minimum. This in turn benefits everyone associated with the company over the long-term.

The use of an efficiency wage makes it possible to attract a wider range of qualified candidates for the open position. With more options in terms of filling the position, the employer is more likely to find someone who is obviously more qualified than the rest, rather than having to settle for someone who meets the criteria, but offers little more. This not only provides immediate benefit to the employer, but may also set the stage for cultivating abilities and talents that ultimately are of service to the company over the years.

There is even a nutritional benefit that is sometimes associated with the extension of an efficiency wage. Here, the issue has to do with the ability of the employee to afford a higher quality of foods and to live a lifestyle that is healthier. Assuming the employee does maintain good health, he or she is less likely to miss days of work due to illness. This means that productivity is maintained without the need to ask other employees to cover essential tasks while one employee is out sick.

Each business must look at its own set of circumstances and determine if the use of an efficiency wage would provide beneficial. Once it has been determined that this approach would be advantageous, determining how and when to implement the strategy should be considered carefully. This often involves looking at the potential of each employee under consideration, and deciding if this additional investment in the employee/employer relationship would yield the desired benefits.


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