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Why Treating Your Employees Fairly Can Actually Boost Your Profits

Promotions and coupon codes are fun, but are your employees suffering for it? Retailers that care about people more than products make happier places. Here’s how they do it.

Why Treating Your Employees Fairly Can Actually Boost Your Profits
[Image: Flickr user EvelynGiggles]

There are different ways to make money. You can certainly succeed at the expense of your employees by offering bad jobs: jobs that pay low wages, provide scant benefits and erratic work schedules, and are designed in a way that makes it hard for employees to perform well or find meaning and dignity in their work. You can even succeed at the expense of your customers; for example, by offering shoddy service. People may not enjoy buying from you, but plenty of them will do it anyway if you keep prices low enough.

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In service industries, succeeding at the expense of employees and at the expense of customers often go together. If employees can’t do their work properly, they can’t provide good customer service. That’s why our experiences with restaurants, airlines, hotels, hospitals, call centers, and retail stores are often disappointing, frustrating, and needlessly time-consuming.

Many people in the business world assume that bad jobs are necessary to keep costs down and prices low. But I give this approach a name–the bad jobs strategy–to emphasize that it is not a necessity, it is a choice.

There are companies in business today that have made a different choice, which I call the good jobs strategy. These companies provide jobs with decent pay, decent benefits, and stable work schedules. But more than that, these companies design jobs so that their employees can perform well and find meaning and dignity in their work. These companies, despite spending much more on labor than their competitors do in order to have a well-paid, well-trained, well-motivated workforce, enjoy great success. Some are even spending all that extra money on labor while competing to offer the lowest prices, and they pull it off with excellent profits and growth.

I studied four low-cost retailers that exemplify the good jobs strategy: Mercadona, Spain’s largest supermarket chain; QuikTrip, a large convenience store chain with gas stations; and the well-known retailers Trader Joe’s and Costco. These four companies are different in many ways. Different products, different customers, different ownership structures, different locations, different store sizes.

But here’s what they all have in common. They all make a long-term investment in employees with the expectation that those well-paid, well-trained, well-motivated employees will generate even more than they cost. What makes them worth more than they cost is operational excellence. . . .

How Offering Less Enables the Good Jobs Strategy

Offering less–be it products, promotions, services, or amenities–while also investing more in employees, such as through more training, more stability, or more pay, helps companies reduce their own costs and therefore helps them reduce costs for customers. Offering less makes operations more efficient and accurate, which in turn improves customer service and hence sales. Since improving operations helps employees do a better job, sometimes in ways the customers can see with their own eyes, employees feel greater pride and joy in their work. (Most people like being helpful to other people.) This, in turn, contributes to greater dedication and lower turnover, both of which are good for service, sales, profits, growth, continuous improvement, and return on investment.

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See what I mean? The good jobs strategy is a bit like a healthy human body. There are so many things being done right all at the same time: metabolism, body temperature, calcium levels, semicircular canals, white blood cell counts, and on and on. But it’s the combination of everything, not any particular thing by itself, that makes you healthy. The concept of synergy has already inspired more than its share of blather and hot air. I certainly did not set out to promote an abstract concept, such as synergy. I was motivated to discover empirically how certain companies manage to be so good for so many stakeholders without someone, particularly the employees, getting the short end of the stick. The phenomenon was real: model companies were doing all this long before I came along and wondered how. What I found was that a certain set of operational practices work well together, producing intertwined benefits for employees, customers, and investors.

Let’s see some more of these interconnected effects in action. By improving operational efficiency, offering less helps to improve labor productivity. Fewer products and promotions decrease the physical work in the stores. Employees don’t have to go back and forth so often between the selling floor and the storage room. They don’t need to keep moving things around and changing prices as promotion displays come and go. Here, again, there is a complex interaction between operations and the company’s investment in its people. We saw that offering less and doing it successfully (as model retailers do and as Walmart did not) depend on whether a company has invested in a well-trained and well-motivated workforce that can provide the necessary information “from the trenches” about what customers want and what they can do without. At the same time, offering less rewards investment in labor by making that labor more productive. Labor productivity is a very important metric for low-cost retail. The fact that one operational choice both requires and rewards an investment in labor is emblematic of why the virtuous cycle is indeed a cycle and thus emblematic of how the good jobs strategy works.

With fewer products and promotions, employees can also process customers more quickly at the checkout. Haven’t we all waited and fidgeted, with a combination of pity and aggravation, while some poor cashier tries to remember the product code for Barcarole romaine lettuce or to figure out what to make of two contradictory coupons? The low variety at model retailers makes the cashier’s job a lot easier. Avoiding tie-ups in the checkout line obviously makes customers happy, and you can be sure the cashiers don’t like having a line full of people glaring at them. Labor productivity is higher, which . . . allows stores to make better use of cross-training, which in turn has many benefits for employees, customers, and investors.

Offering less enables retailers to leverage their investment in employees in still other ways. When Trader Joe’s doesn’t carry a particular product that a customer wants, or it is simply stocked out of it, its knowledgeable employees can recommend something else–and the customer feels that the employee really knows what he’s talking about. (This makes the employee happy and motivated, too.) Hence, an investment in employees’ knowledge can be a substitute for an investment in inventory–a great deal for retailers. And investment in employees’ knowledge has cumulative effects that an accumulation of inventory will never have. In short, investment in employees yields more “return” than investment in inventory.

Companies that successfully offer less also leverage their investment in employees to better understand what their customers want. We will see later what employees who know what their customers want can do for their company’s profits, growth, continuous improvement, and ability to capture strategic opportunities.

Offering less even gives employees greater job security because it increases efficiencies and reduces waste. When there’s waste–which means higher costs for the company– labor is often the expense to be cut. That’s largely what drives the vicious cycle: seeing labor as a kind of fat that’s easy to trim. But when retailers reduce waste by offering less, employees benefit because now there is more to spend on them. Model retailers know–they don’t just believe, they know–that by spending more on their employees, they are investing in their own success. That’s what powers the good jobs strategy.

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This article is an excerpt from The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits and is reprinted with permission.

Zeynep Ton is an Adjunct Associate Professor at MIT Sloan School of Management and author of The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits.

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