THE ENTREPRENEURIAL STRATEGIST

Productivity: You Get What You Pay For (And Then Some)

Sweating a possible rise in the minimum wage? Research finds that companies that go above and beyond reap many rewards.
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It’s an ever-present dilemma:  How much of your profits should go into the pockets of your people?  Does it really pay off to pay workers more, treat them better and invest in their development?  For many, a world in which competitive advantages last for nanoseconds means that the skills people were hired for yesterday may not be relevant to the needs of the business tomorrow.  So, some argue, being generous with employees is a luxury they just can’t afford.  Well, there is some new, interesting and somewhat counterintuitive evidence that companies can actually benefit by sharing more of their profits with their employees.

MIT Professor Zeynep Ton has a brand-new book about to be published, called The Good Jobs Strategy.  Ton finds that companies who treat their employees well actually do better than those that don’t, for a variety of reasons.  She cites the success of Southwest Airlines, UPS, Toyota, and Zappos and hones in in detail on a group of retailers (Costco, QuickTrip, Trader Joe’s and Spain’s Mercadona) who have generated lower costs, higher profits and greater customer satisfaction and loyalty than comparable companies (such as Wal-Mart).  While that sounds too good to be true, Ton is not alone in coming to this conclusion.  My former colleague at Wharton, Marshall Fisher, found that for every dollar of increased wages in a retailer that he studied, more than $10 in revenue was brought in.  For more understaffed areas of the stores he studied, the boost from better customer service and more engagement was as high as $28.

One of the ways in which Ton’s thinking has helped companies accomplish the paradoxical outcome of happier and more engaged workers and higher profits is by changing their workforce management systems.  It turns out that when you stop thinking about your people as cost centers and units of production and start thinking about them as sources for possible opportunity and customer satisfaction, they can do a lot more for you.  Companies such as IKEA have been utilizing Ton’s work to go beyond thinking of people simply as units of production to thinking of how best to deploy them strategically. 

As some economists have pointed out, business owners that focus narrowly on direct costs such as wages and benefits may be misreading the total cost of their employee base.  For instance, high turnover among poorly paid workers is well-documented and extremely expensive - according to human resource experts, it costs anywhere from 30 to 150 percent of annual wages to replace a departed employee. So at 100% turnover (not unusual among low-wage workers) one employee is actually costing you the price of two in a year.  It’s also hard to see how poorly engaged or stressed-out workers are going to represent your company well to your customers.  

In my own research on how companies can transition from advantage to advantage smoothly - picking up new opportunities as old ones fade away - the people question is at the heart of their strategies.  Of ten companies that achieved the remarkable result of increasing net income by 5% or more for ten years in a row, all of them have won awards as exceptional places to work, and despite low turnover have managed to transition their people from advantage to advantage while avoiding dramatic downsizing and wrenching restructuring.  Among the principles they seem to endorse are that providing developmental support and hiring for so-called “learnability” actually provides a source of advantage that can be enduring, even as product and service attributes are quickly copied.  Perhaps being generous in a world of transient advantage can offer surprising benefits.

IMAGE: Gallery Stock
Last updated: Feb 10, 2014

RITA GUNTHER MCGRATH | Columnist

Rita Gunther McGrath, a professor at Columbia Business School, is a globally recognized expert on strategy and the author of three books, including 2013's The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business (Harvard Business Review Press).

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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