Good Jobs Are Good Business

8 minute read
Ton is a Professor of the Practice in the Operations Management group at MIT Sloan School of Management, and the president of the nonprofit Good Jobs Institute. She is the author of The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work

There’s a lot more to a good job than making money. But for more than 50 million Americans who work in low-wage jobs, pay matters a lot—more than those of us who make higher wages may think.

Low and inconsistent pay wreak havoc on workers’ lives, leaving no margin for emergencies or unexpected expenses. Juggling multiple jobs and not being able to meet obligations increases stress, undermining mental and physical health and cognitive functioning, which leads to more errors and less reliable attendance. As a result, they find themselves stuck in a vicious cycle: low pay hurts their performance, which keeps them stuck in low paying jobs.

In my research and work with more than two dozen companies at the nonprofit Good Jobs Institute, I’ve seen that companies, too, pay a steep price for low pay. Low pay drives high employee turnover, including for K-12 teachers. In low-wage settings including senior living, call centers, warehouses, retail stores, and restaurants, we have seen some companies replacing their entire frontline workforce annually, with more than 100% employee turnover. Many executives I’ve met didn’t think costs of turnover were high enough to justify higher pay—but they had never even quantified the full costs of turnover to begin with.

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At most companies with which Good Jobs Institute has worked, employers are pouring the equivalent of 10 to 25% of their labor budget on replacement costs—the costs to recruit, train, and reach baseline productivity, only to start all over again when employees leave. We worked with one company whose replacement costs were 45% of payroll because employees had to be licensed. But those costs pale in comparison to costs from the inevitable poor operational execution that takes place when there is high turnover: lower sales from mistakes, slow service, and customer dissatisfaction; high product costs from more errors, overtime costs, and reduced labor productivity. Not to mention the lost sales from shutting down stores—recall the signs that went viral during the pandemic asserting, “we’re closed because we all quit.”

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When pay is low, companies end up in their own vicious cycle: High turnover hurts company performance, ensuring that pay stays low and turnover stays high. Furthermore, when companies are in this cycle, they end up making many interrelated decisions that weaken their system. Managers are always fighting fires, never having enough time to hire and train well. Inevitably, these companies don’t trust their frontliners to do a good job and design the jobs for interchangeable pairs of hands rather than humans with brains, wasting so much talent and potential along the way. Understaffing is common, which causes even more problems and creates anxiety for employees and their managers. Overworked managers then leave or ask to be demoted. Expectations become dismally low.

For instance, high turnover at a convenience store chain we worked with forced managers to make what they called, “desperation hires”: when someone walked in to apply for a job, they were hired immediately, with no interview or background check, and put on the floor without training. That already told employees that this was not a high expectations environment, and in turn, the stores struggled with absenteeism and poor service. Because store managers couldn’t trust this revolving door of new employees, they spent most of their time re-checking counts of the cash drawer and lottery tickets—not on driving better service. So, to get customers in, executives spent resources on rewards programs and marketing, only to lose them quickly due to long lines and dirty bathrooms. The chain had to halt plans to start offering high-margin fresh food, because errors were leading to spoilage and food safety issues.

High turnover is not just expensive. It’s ruinous. It’s uncompetitive. It’s inhumane. And a system based on low pay and high turnover is a weak match for what’s coming. With more retirements, people having fewer kids, it’s not going to get any easier to hire and retain frontline workers. A leaked Amazon memo from 2022 revealed that they had to change their expansion plans because, given its high turnover rate, it would simply run out of people within a few years. With frontline employees in high demand, and new minimum wage regulations, continuously rising wages are inevitable. If companies don’t change their system that treats employees like a pair of hands, they will face increasing costs for the same output—after all the job is the same.

But there’s a better way. Rather than seeing employees as a cost to be minimized, companies like Costco and H-E-B view them as human beings who can drive profitability and growth, paying them significantly more than market. In 2022, average hourly wage for a Costco worker in the US was $26, almost $10 more per hour than a typical retail worker. H-E-B’s pay strategy is to pay as high as they can, not as low as they can. But these companies don’t just pay more—they design a system that increases productivity and sets up employees to succeed. They eliminate wasteful activities (such as constant changes to displays), stagger new product introductions to smooth workload, cross-train employees, empower them to make decisions, and give them enough time to serve the customer well and engage in improvement. Unlike the vulnerable high turnover system, both companies have a system of excellence where workers are treated with dignity and respect, customers enjoy lower prices and better service, and shareholders are rewarded with strong returns.

Consider the example of QuikTrip, a convenience store chain with gas stations. Far from “desperation hires,” getting a job at QuikTrip is quite competitive. Training is evaluative—if you can’t deliver the fast and friendly QuikTrip experience then you don’t start working. Employees are accountable to high standards to keep shelves stocked, bathrooms clean, and customers in and out quickly. Store managers constantly give employees feedback to improve performance. With just quarter of the turnover of the industry average, QuikTrip can spend more on each employee and trust them to use good judgment, which gives employees more agency to drive higher sales and customer satisfaction.

The good news: companies can change. Walmart’s Sam’s Club, call centers at Quest Diagnostics, and pet store chain Mud Bay improved pay, schedules, and redesigned their system to improve productivity and service. In 2019, Sam’s Club increased pay $5-$7 an hour for several key roles and, from 2020-2022, further increased hourly pay for all employees by 18%. In 2016, Quest Diagnostics raised starting pay for its call center workers from $13 to $14 and implemented tenure-based increases. Mud Bay, a chain with 2% profit margins, increased hourly pay 24% over 3 years. By 2022, it was able to pay all its employees a living wage, based on the MIT living wage calculator for different locations. These companies didn’t just raise pay, they made employees’ work more valuable, making the pay investment worthy.

What were the results? Within two years, Sam’s Club reduced hourly workers’ turnover by 25%. Manager turnover dropped even more. Within eighteen months, Quest Diagnostics reduced hourly turnover by more than 50%, and absenteeism dropped. Within three years, Mud Bay reduced turnover by 35%.

In addition to lower turnover costs, all these companies saw higher sales, lower costs, and improved productivity. At Sam’s Club, productivity increased 16%, customer loyalty increased 7%, and sales grew nearly 15% without opening any new stores. At Quest, overall costs decreased $2 million, $1.3 million of which came from ideas from the reps. Customers received better service, with fewer transfers and faster answer rates. At Mud Bay, employees were able to generate 12% higher sales per labor hour and 25% higher sales per square foot (compared to 9% industry average at the time). We’ve seen similar results in small restaurants and bakeries.

Leaders at these companies realized that to win with their customers and grow, they couldn’t afford high employee turnover. Instead of asking, “how much will it cost to increase pay?” they asked the enlightened question of, “what will be the cost to my competitors if we get this right, and they don’t?”

Throughout the pandemic, we called these frontline workers essential because they are essential to the functioning of our economy. They deserve living wages and companies can profitably offer those wages, if they choose to adopt a different system. If more companies chose good jobs, we could rebuild a strong middle class and better businesses.

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