Business Strategy

The false dichotomy of Wages vs Profits

The false dichotomy of Wages vs Profits

How to bring your company to the global view

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Susan Cramm, leadership coach, author, and former CFO and CIO, who worked as an executive in the fast food industry for more than 10 years, wrongly believed that decreasing the hourly wages of frontline employees would lead to an increase in profit.

According to Zeynep Ton, Professor of Operation Management at MIT, choosing profits over paying well is an “unnecessary sacrifice” as they go hand in hand. Much of her research work has been carried out in the retail sector where bad jobs are widespread, and in her book, The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits (New Harvest, 2014), Professor Ton has explored the shortcomings of what she calls “bad jobs”: jobs with subsistence wages, minimal benefits and training, and chaotic schedules.

Also Read : Robots: They Can Make The High Tech  Employees’ Wages Fall Down!

Subsistence-wage jobs create problems for companies even in the retail and fast food sectors and make it more difficult to compete correlating with sub par financial performance on smaller sales per square foot, less frequent inventory turns, and lower employee productivity. This is, in part, due to the problems that they create for employees, customers and taxpayers.

For employees, on the other hand, subsistence-wage robs them off dignity and satisfaction and is not enough to make ends meet or have a rational family life. In treating labors as expense rather than assets, companies try to reduce labor cost by reducing hours and training, which results in the lowering of their staff’s value to the company, to themselves and to society. Professor Ton, in her book, cites – “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.”

The subsistence-wage employees, due to “rarely given adequate training, the proper equipment or enough time to do their jobs well”, deliver poor service and low-quality goods to customers who are accustomed to expecting and tolerating it.

As a result, the taxpayers end up financially supporting companies whose employees require public assistance due to subsistence wage. Two reports—one from the U.C. Berkeley Labor Center and the University of Illinois, the other from the National Employment Law Project — estimate that US taxpayers spend  US$2 billion or almost $4 billion per year on low-income benefits for these employees which encourage these companies and other low-wage employers to continue the practice of bad jobs ultimately harming them in the long run.

On the other hand, good jobs provide good pay, benefits and expected schedules and also provide the employee the opportunity of growing and succeeding through empowerment, improvement and development. According to Professor Ton, this does not mean that the business leaders providing good jobs are selfless. Rather, they know that this is “the best and most sustainable way to provide superior returns to their investors in the long term.” One of her model retailers providing good jobs, Costco, has sales-per-square-foot “almost 70 percent higher” than its competitor Sam’s Club, and inventory turns “50 percent faster” than Walmart.

Professor Ton says that companies can create good jobs in the toughest of market conditions by avoiding and reorganizing conventional methods of running businesses which would reduce cost, increase labor productivity and put  “employees at the center of the company’s success” and cites examples of model retailers like Mercadona, QuikTrip, Costco, and Trader Joe’s.

Her research led her to discover the following 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”:

  1. Offer fewer products: Model retailers know that a high variety of products compromises execution of operation, increases inventory waste and reduces productivity and service. Hence, “Model retailers offer their customers less than their competitors do”.
  2. Standardize and empower: Model retailers adapt to the needs of the customers by combining standardization with empowerment. They are therefore, highly efficient.
  3. Cross-train: Model retailers, instead of adjusting the schedules of the labors i.e. the number of employees and the duration of the shift, cross-train “so their employees are continually busy and customers always get good service.”
  4. Operate with slack: Model retailers appreciate the fact that slack improves customer service and hence, overstaff their stores. Hard to believe but, they also involve their employees in continuous improvement and thus reduce costs!

Professor Ton concludes that these practices work well together resulting in benefits for all – employees, customers and investors. This produces a continuous cycle of success – well-paid and trained employees provide good customer service which in turn leads to increase in sales and thereby profit and this is turn allows the company to invest further in employees which is possible due to the reduced costs and increased labor productivity operations. Professor Ton explains “If you want to offer good jobs and low prices at the same time, operational excellence is not optional, it is mandatory.”

Also Read : Job Switch Can Be A Better Option As There Has Been A Slight Increase In The General Wages

Sadly, there aren’t many model retailers, and getting a good job is more difficult than getting into an Ivy League college. But Professor Ton’s research is not only business; it’s personal. Professor Ton aims at convincing companies to offer good jobs by remodeling the traditional way of thinking with innovative ideas for improving operations and promoting relationship between people and value.

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