About one in five American workers today have jobs that offer low wages, poor benefits and few opportunities for advancement. But what can you do, right? After all, don’t we know that what’s good for business is often not good for people?
Not really, argues Zeynep Ton, an adjunct associate professor at the MIT Sloan School of Management, in this recent article. Although the conventional wisdom is that companies have no choice but to pay their employees poorly to remain competitive, Ton’s research suggests the opposite is true: When companies invest in their workforce, everybody wins.
Ton studied the practices of four highly regarded retailers – Mercadona*, QuikTrip, Trader Joe’s, and Costco – and found that “highly successful retail chains not only invest heavily in store employees but also have the lowest prices in their industries, solid financial performance, and better customer service than their competitors.” Indeed, low wages are “not a cost-driven necessity but a choice.” Her analysis suggest that one key to breaking the perceived trade-off is “a combination of investment in the workforce and operational practices that benefit employees, customers, and the company.”
What practices? Two examples from Ton’s paper:
- Reduce your offer and, by that, the complexity of your operation. Data suggest customers do not mind and sales do not have to suffer;
- Achieve flexibility and efficiency by cross-training employees. Instead of compartmentalizing tasks, employees can be trained broadly.
Labor does not have to be viewed as a cost to be minimized In fact, the most successful businesses think of their employees as an asset to be developed. Those that do not are missing out on opportunities to improve their overall performance while promoting economic growth more broadly (by giving people good jobs). As Ton explains, when labor is viewed as a business asset, a virtuous cycle can result:
Investment in employees allows for excellent operational execution, which boosts sales and profits, which allows for a larger labor budget, which results in even more investment in store employees.
So, if it is possible to be profitable while keeping customers and employees happy, why the perceived tension? Why not put customers, employees, and society ahead of short-term profits or, at least, at the same level?
Ton examines this question a little bit in her paper, but a recent piece in the Washington Post also offers some interesting answers. The article, “How The Cult Of Shareholder Value Wrecked American Business,” opens up with a blunt observation:
In the recent history of management ideas, few have had a more profound — or pernicious — effect than the one that says corporations should be run in a manner that “maximizes shareholder value.
The author goes on to argue that much of what’s wrong with today’s economy – rising inequality, recurring financial scandals, wild economic swings – is in fact rooted in this ideology.
The funny thing is that this supposed imperative to “maximize” a company’s share price has no foundation in history or in law. Nor is there any empirical evidence that it makes the economy or the society better off.
The article does a nice job explaining how the “shareholder first” ideology became the norm in the 1970s and 1980s, but it wasn’t always like this. The first American corporations “were widely viewed as owing something in return to a society that provided them with legal protections and an economic ecosystem in which to grow and thrive.”
It also gives a good description of the institutional infrastructure that supports the current “profits-first” mentality – e.g., business schools that indoctrinate students, corporate lawyers who advise against actions that might affect company value, the Wall Street establishment fixated on quarterly measures, the exorbitant salaries of top executives that are tied to the short-term performance of the company, etc.
Going back to Ton, she asks a fundamental, related question on her blog: What should be the purpose of a firm? In my mind, this is the question that matters. It is not posed nearly enough and, when it is, the answer is usually narrow and regarded as indisputable: To be profitable. Well, yes, but not only and not at any cost. In her writings, Ton highlights the work of Harvard’s Michael Porter and Mark Kramer, who argue that the purpose of a firm should be to “create economic value in a way that also creates value for society by addressing its needs and challenges.”
So, to go back to my initial question, part of the reason why so many workers have poorly paying jobs is because labor costs are perceived to be in conflict with profit making. But research and history show that this is a misconstruction. It is possible to run a business that creates value for everyone concerned. In fact, these are the businesses that last.
But, even if the creation of these types of business is harder, and even if the resulting profits have to be shared in a more egalitarian fashion (i.e., among employees, suppliers, shareholders), shouldn’t we strive for that model anyway? Research, science, innovation, and creativity are tools at the service of the social goals that we, as a society, define and set for ourselves. These goals are malleable; the question is whether there is political will to address issues such as these, which are at the root of the growing poverty and the political and socioeconomic inequality that plague the nation.
- Esther Quintero
* This is the largest supermarket chain in Spain, with more than 1,300 stores and $16 billion in sales according to Ton. I actually grew up next to one of these and can attest to some of Ton’s qualitative findings such as the fact that employees at Mercadona know costumers by name.