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The False Dichotomy of Wages vs. Profits

Susan Cramm

Susan Cramm, leadership coach, author, and former CFO and CIO, is committed to the principle that the best leaders take care of business by taking care of the people entrusted to their care.

 

 

For more than 10 years, I worked as an executive in the fast food industry, and during my tenure, I believed that increasing the hourly wages of frontline employees would lead to lower profits. I now know I was wrong. 

According to Zeynep Ton, a professor of operations management at MIT, companies can provide good, well-paying jobs and drive profits at the same time. Choosing one over the other is, according to Ton, an “unnecessary sacrifice.” During a recent conversation, Ton and I discussed her research and book, The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits (New Harvest, 2014), exploring the notorious downsides of what she calls “bad jobs”: jobs with subsistence wages, minimal benefits and training, and chaotic schedules. We also talked about the ingredients critical to creating good jobs. Much of her research was performed in the retail sector, a breeding ground for bad jobs, served up by misguided executives such as myself.

Even in industries where they are prevalent, like retail and fast food, subsistence-wage jobs are problematic for companies. They make it more difficult, not easier, to compete. They correlate with subpar financial performance on several measures: smaller sales per square foot, less frequent inventory turns, and lower employee productivity. That’s in part because of the problems they create for everybody else—employees, customers, and taxpayers.

In industries like retail and fast food, subsistence-wage bad jobs make it more difficult to compete.

For employees, Ton points out, bad jobs don’t provide “dignity and satisfaction,” enough money to make ends meet, or “enough stability to have a sane family life.” Companies that provide bad jobs are treating labor as an expense, rather than an asset. They try to drive down labor costs by reducing hours and training, and in the process they diminish their staff’s value to the company, themselves, and to society. In her book, Ton cites research that “almost a quarter of all American working adults…have jobs that do not pay enough to support a family” and that “nearly 30 percent of U.S. workers by 2020 are expected to hold jobs that pay below-poverty-level wages.” 

Customers are conditioned by bad jobs to expect—and tolerate—poor service and low-quality goods. These are produced and delivered by employees “rarely given necessary training, the proper equipment, or enough time to do their jobs well,” Ton adds.

As for taxpayers, they end up subsidizing companies whose employees require public assistance because they can’t live off what they’re paid. Two reports—one from the U.C. Berkeley Labor Center and the University of Illinois, the other from the National Employment Law Project—estimate, respectively, that U.S. taxpayers spend US$2 billion or almost $4 billion per year on low-income benefits for employees of fast-food restaurant chains. This unintended subsidy could be an incentive for these companies, and other low-wage employers, including many retail chains, to continue practices that hurt themselves in the long run.

Good jobs, on the other hand, provide good pay, benefits, and predictable schedules, and the opportunity to grow and succeed through a culture of empowerment, continuous improvement, and employee development. Business leaders who provide good jobs don’t do so for altruistic reasons. They have found the strategy to be “the best and most sustainable way to provide superior returns to their investors in the long term,” according to Ton. Costco, one of her so-called model retailers, provides good jobs with sales-per-square-foot “almost 70 percent higher” than its competitor Sam’s Club, and inventory turns “50 percent faster” than Walmart.

By profiling model retailers such as Mercadona, QuikTrip, Costco, and Trader Joe’s, Ton makes a convincing case that good jobs can be created in toughest of marketplaces, and leaders need to eschew conventional wisdom and rethink their businesses from the ground up. To offer good jobs, model retailers operate in a way that reduces costs, increases labor productivity, and puts “employees at the center of the company’s success,” she says.

In her research, Ton discovered four operational choices made by model retailers that, “when executed together and combined with an investment in people” result in “great service for customers and high returns for investors.” The operating choices common to model retailers include:

1.      Offer fewer products: “Model retailers offer their customers less than their competitors do” because they understand that a high variety of products complicates operational execution, increases stock outs and inventory waste, and reduces labor productivity and customer service.   

2.      Standardize and empower: By combining standardization with empowerment, model retailers are highly efficient and adaptive to customer needs.

3.      Cross-train: Rather than adjust labor schedules (the number of employees and the duration of the shift), model retailers cross-train “so their employees are continually busy and customers always get good service.”

4.      Operate with slack: Model retailers err on the side of overstaffing their stores, understanding that “slack improves customer service, and—believe it or not—reduces costs by allowing employees to be involved in continuous improvement.”

These “operational practices work well together, producing intertwined benefits for employees, customers, and investors,” Ton says. This results in a virtuous, reinforcing cycle of success as well-paid and -trained employees increase the quality of customer service, which, in turn, increases sales and profit, allowing for further investment in employees. The relatively high investment in employees is made possible by designing operations to reduce costs and increase labor productivity. According to Ton, “If you want to offer good jobs and low prices at the same time, operational excellence is not optional, it is mandatory.”

Unfortunately, there aren’t enough companies following the good jobs strategy. Landing a job with a model retailer is statistically harder than getting into an Ivy League college. Ton is making it her mission to convince misguided companies to rethink their operations from the ground up. For business leaders in any industry, pursuing good jobs represents a fruitful opportunity for change. It gives you a chance to rethink conventional wisdom, get creative about improving operations, and further the conversation about the relationship between people and value. If Professor Ton’s research is to be believed, and it’s convincing, then there’s a clear business case. But in the end, this is not just business; it’s personal. The good jobs imperative is a way to make a lasting contribution, well beyond the bottom line.

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The False Dichotomy of Wages vs. Profits