Floor-A-Day is a disposable paper floor manufacturing firm, operating in a competitive industry with several firms that offer very similar wages and benefits to their workers. Your firm has a policy not to match outside offers made to workers currently employed by the firm. Mr. Nosweeper, a VP for floor pattern development, suggested that it will be profitable for the firm to change the policy and to match all offers. He supported his argument with the following facts:
i. Those who quit Floor-A-Day accept a job elsewhere that pays on average only 4% more than what they were making at their old jobs
ii. The cost of hiring a replacement for a worker is 40% of his annual wage; thus, a 4% increase in wages is a small price to pay for retaining a worker
iii. The turnover rate in the firm is 10% per year. Mr. Nosweeper argued that the cost of the proposed policy change cannot possibly exceed 0.4% of the wage bill
Ms. Smith, a brilliant mind who came up with the famous marketing slogan “a floor a day keeps the dirt away” objected to the change in offer matching policy. She argued forcefully that:
a. The proposed offer matching policy may increase the wage bill by far more than 0.4%. Ms. Smith assumed that some workers may require a wage premium of more than a few percent in order to be lured away by other employers. What was her argument?