PayPal just had its two best years ever, and the growth of e-commerce is only one reason. Instead, CEO Dan Schulman credits the company's success at least in part to a 2019 initiative to raise the salaries of its hourly and entry-level employees and dramatically lower their health care costs, to ensure that everyone who works at the company can afford to pay their bills and receive health care when they need it. His approach is a lesson for every business owner.
In 2019, Schulman made a disturbing discovery: Even though the company paid everyone at or above market rates, many of its lower-paid employees were struggling to get by. For example, Mark Parker, a customer service representative in Omaha who is the sole breadwinner for his wife and two small children, told Business Insider that before PayPal raised his pay, he used to sell his blood plasma twice a month and went without health insurance for himself in order to cover his children's expenses.
"We did a research study, and I did it because I thought I was going to get back this great information that I was going to talk about at an employee meeting about how well we pay," Schulman explained during a recent TED Talk interview. "And what I found is, unfortunately, like the rest of the world, even though we paid at market or above market, 60 percent of our operations personnel -- our entry-level employees, our hourly workers -- faced the same thing. They struggled to make ends meet. And that was simply unacceptable for me."
After a lot of research and discussion with some of PayPal's lowest-paid employees, Schulman found that prevailing market wages often weren't enough to live on. There was a better system for determining how much pay people needed: net disposable income, defined as what's left over after an employee pays for the very basics -- taxes, food, housing, and health care. Schulman was dismayed to learn that 60 percent of PayPal employees had net disposable income (or NDI) of only 4 to 6 percent of their pay. People with such low NDI would always fall behind on their bills, because anything from an unexpected car repair to dental work to a trip to visit family would be more than they could afford, and they would never have enough left over from their pay to save for future emergencies or other financial needs.
Schulman set out to bring employees' net disposable income closer to 20 percent, which is what personal finance experts recommend. To do it, the company increased its contribution to health care costs, lowering what employees had to pay by about 58 percent, increased pay by an average of 7 percent, and gave all employees restricted stock units -- shares that vest over time, depending on an employee's tenure and country. All this amounted to a big investment for PayPal, but by the end of 2020, the company had raised average employee NDI to 16 percent. The company also offered financial education to further help employees manage their money and begin growing their savings.
Why low salaries don't save money
All of this may sound expensive, and it was. But Schulman was convinced that the investment would pay off. "If people are struggling to make ends meet, they are not as productive at work," he explained in the TED interview. "They're worried about, what am I going to do with my kids? My kid just got sick. I don't have health insurance. I think there's a spiral that occurs."
This is why he believes that raising employees' NDI to where they can live without those stresses creates a competitive advantage for any company. "You think you're actually saving money by paying less, but the reality is, at least in my belief system, you take care of your employees and other things naturally flow from that," he said. "They love being a part of that company. They take care of customers better. And all of those things inevitably accrue to the benefit of a company in terms of how it's trying to serve its ultimate end market."
PayPal's performance seems to bear him out. In 2019, the first year that the program was in place, the company saw revenue grow from $15.5 billion to $17.8 billion, and although the company has not yet released its 2020 financials, it's projecting 20 percent or more in revenue growth. Profitability is rising as well, with 28 percent growth in non-GAAP earnings in 2019 over 2018, and the company's projecting that it will report similar growth from 2020 to 2021.
There are, of course, many factors driving PayPal's growth, including the relentless rise of e-commerce. But professors at Harvard and Stanford told Business Insider that there's plenty of evidence to show the bottom-line benefits of paying employees enough so they can live without constant financial fear. In fact, it's a strategy Henry Ford pioneered back in 1914 when he more than doubled his (male) auto workers' wages to $5 per day and shortened the workday to eight hours. His competitors thought he was nuts, but the move paid off handsomely in heightened productivity and loyalty.
What about your company? If you have hourly or entry-level employees, do you know what their net disposable income is? And how might your company benefit if you raise it?