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MIT Business Professor: Happy, Well Paid Workers Equal Higher Profits

Hey corporate America, here's why you should be taking better care of your work force instead of racing to the bottom.

I have to say that I was really happy to see this segment air this Sunday on CNN's Fareed Zakaria GPS. It flies on the face of everything we're being told by way too many others in the media, especially on Fox "news." Most of corporate America has bought into the conventional wisdom that a race to the bottom on wages and benefits for workers always translates into higher profits.

In fact, as MIT professor Zeynep Ton discussed with Zakaria, the opposite is true, and I'm sure a lot of us here have our own stories and experiences that prove her correct, as well.

Ton used the example of warehouse stores (such as Costco) that run on very low profit margins, but where Costco has managed to be profitable by treating their workers better. They've got lower turnover. They're not constantly spending money on training new employees. I'm sure a lot fewer of their employees are stealing from them because they're not working on starvation wages and underpaid, and you've got a happier, more productive worker who cares about the company doing well -- because you treat them better.

From personal experience, I've watched what happens when a company decides they can take shortcuts when it comes to training their workers, or has management in place that believes you can rush projects with no consideration to future costs when you fix something for the fifth time that should have been fixed right in the first place, or who expects employees to perform well and give 100% when they're understaffed.

Sadly, those decisions are often made by people with no real understanding of what it takes to keep things running in the day-to-day operations of the company and who are accountants, or someone brought in from another company, rather than someone who has come up through the ranks.

We've got a culture that too often rewards quick fixes and the biggest suck-ups, or somebody's friend or relative (rather than the most qualified people) moving their way up corporate ladders because they tell their bosses what they want to hear, rather than what they need to hear.

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We have a culture that rewards treating your average worker as a commodity rather than a valuable asset to a company that you invest in. We have a culture that rewards a race to the bottom and the income disparity we see now with CEO's making hundreds of times more than the lowest paid employees at their companies.

And sadly, as my cohort Capper noted in an email where some of us were discussing this segment:

To make things even worse, these so-called business minded geniuses have brought the same mentality to government.

The Bureau of Milwaukee Child Welfare has a turnover rate of nearly 60 percent. State corrections are hundreds of people short because they can't attract anyone and if they do, the rookies don't stick around. Milwaukee County, under the plutocrat Chris Abele, is in the same boat. His solution - withholding our raises he is required to give us by law.

It's always easy to do a cost/benefit analysis on what cutting jobs, or lowering wages means for a company (or to the government, for that matte), if all you look at is the price of labor and not the value your employees bring to a company. That's a lot harder to quantify and doesn't fit nicely on some accountant's spreadsheet. They do always manage to find a way to do that when it comes to upper management -- and what value they supposedly bring to a company. Funny how that works out.

It would be nice to see more discussions like the one above make their way onto our airways, but don't hold your breath for that to happen any time soon.

Full transcript via CNN:

ZAKARIA: Do you want a raise? Would you like more benefits? Perhaps you'd like to be treated better at your work place. If you are among the 100 percent of workers surveyed who answered yes to any of these questions, you will want to listen to my next guest and tell your boss about her.

Zeynep Ton has a rather contrarian view of just what helps the bottom line. While many in corporate America like to use the axe to improve the balance sheet by cutting staff, salaries and benefits, she says they should do just the opposite.

Sounds good, right?

Zeynep Ton has come up with what she calls the "Good Jobs Strategy for Business Success." She is an adjunct associate professor at MIT's Sloan School of Management. And this theory doesn't come out of thin air. It's based on more than 10 years of research studying retail operations.

So welcome.


ZAKARIA: What I am struck by is what you're describing is -- you know, it seems too good to be true because for so long the mantra has been that we are in this fierce global competition, companies are facing all this competition from all over the world. They have to cut costs, cut costs and cut costs, and as a result, you know, that's probably one of the forces that has kept median wages in America and in the Western world pretty flat.

You're saying that companies are actually making the wrong decision.

TON: Yes. So the conventional wisdom in business is that, if you want to offer the lowest prices to our customers, then we must pay our employees as little as possible and treat them as interchangeable parts. What I found in my research is that the tradeoff between low prices and good jobs is actually forced tradeoffs. If the companies run their operations well, they can have low prices, good jobs and great shareholders' returns at the same time.

ZAKARIA: Give me an example of the kind of company that you think --

TON: And the types of companies that I studied are supermarkets, warehouse clubs, convenience stores with gas stations. So one of my --

ZAKARIA: So these are low-margin --

TON: These are low -- these companies are fighting in low-margin industries and they need their costs to be as low as possible. The way they do that is through investing in their workers and making some very smart choices. The thing is, when I looked at companies like Mercadona, Spain's largest supermarket chain, I found that they weren't just paying their people more, they were actually designing a whole system that improved people's productivity and enabled their employees to play a big role in the company's success.

ZAKARIA: So, you know, does -- one piece of this where you're saying that paying higher wages. What are they getting in return for these higher wages?

TON: Yes. We have to think about higher wages in the broader context of a company's strategy. Let me give you one example. The companies that I observed -- you know, if you go to a supermarket, and -- low- cost supermarket, chances are you won't be able to find people to be able to help you. Right? Because most of the companies see labor as a cost so they try to have as few people as possible on the selling floor.

The companies that I studied deliberately have more people than the expected workload. How can this be good for them, you might say. Well, this is great for them because when a store is understaffed there are lots of problems. The checkout lines are too long, products are in the wrong place, the prices are inaccurate. And these increase costs and lower service.

So the companies that I studied recognize these, so they ensure that these costs are not observed and they realize that if they give people -- if they give their employees enough time, they could identify improvement opportunities so that they can reduce costs everywhere else in the system.

ZAKARIA: See, in a way, the western capitalist model seemed to be moving away from this because it used to be, you know, that when you made products, the human being was involved in making all parts of that product.

TON: Yes.

ZAKARIA: It was almost like a craft. And then you get the assembly line and Henry Ford says, no, I'm going to break these jobs up into very discreet tasks and you just have to turn the screw, and you just have to hit the hammer, and we're going to make it so that it -- you know, it becomes very mechanical. Are you saying we need to return to the 19th century artisanal model?

TON: I'm saying that after Henry Ford Toyota came along and said that model is not right. We want that standardization but we also want to empower the assembly line worker to identify problems and be part of improvements. And through investing in people Toyota showed us that it can lower costs and increase quality at the same time.

I'm saying that the type of revolution that we saw in the auto industry, the Toyota revolution, we can see it in industries like retail through a good jobs revolution.

ZAKARIA: And in a sense the Toyota example suggests that, even though your research is mostly in retail, it could be applicable everywhere.

TON: Absolutely. In fact, you know, I stand on the shoulders of other academics who have argued for a long time that investing in workers and making smart decisions drive great value for companies and their investors.

ZAKARIA: What does it say about capitalism that so many capitalists are doing this wrong? Is it a focus on short-term that's wrong? Is it -- I mean, how would you describe it, right? Because a certain way, you're saying all these companies are actually not understanding their own enlightened self-interest.

TON: Look, I'm a business school professor and I'm all for capitalism. But a lot of good jobs strategy requires a long-term view. And people are wired to emphasize the short term at the expense of the long term. People still smoke, they still don't exercise. We know that. In addition, good jobs strategy is a holistic strategy. It requires a systems view. It's not about just raising wages. It's not just about training.

And a lot of companies are stuck in silos. They work in silos. They don't see the whole picture. Achieving excellence is always harder than achieving mediocrity. And there are a lot of companies are stuck in mediocrity. They can still make money that way.

ZAKARIA: Fascinating stuff. Thank you so much.

TON: My pleasure.


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