Profit at the bottom of the ladder

In the midst of job losses and wage stagnation, new research shows how businesses can profit together with workers at the bottom of the corporate ladder

Companies have long been accustomed to using high wages and good working conditions to attract and retain highly skilled professionals. At the same time they often pay relatively little attention to the benefits, wages, and incentives provided to their lower level employees who are assumed to be more readily replaceable or not as valuable to the company’s performance.

We spent six years conducting a study focused on understanding the experience of companies that have invested in employees at the bottom of the corporate ladder. The companies we studied included privately owned and publicly-held firms, were located in nine different countries, ranged in size from 27 to 126,000 employees and worked within very diverse sectors from automotive parts to food production and pharmaceuticals.  We examined whether they had succeeded at improving working conditions – and what impact their efforts had on their financial bottom line.

The results experienced by the companies we studied were striking. Great Little Box, a packing goods manufacturer in Canada, combined open book management policies with financial incentives for employee ideas that saved the company money. Employee suggestions for more effective use of machinery led to savings of tens of thousands of dollars.  The company sustained solid growth – sales had grown 36 per cent from 2005 to 2010. Their success meant Great Little Box had been able to buy out competitors that were going out of business, purchasing the assets of six companies since 2003 with two more acquisitions pending in 2010.

After implementing leave and flexibility policies, Autoliv Australia, an automobile seat belts and air bags manufacturer saw turnover decrease from 15–20 per cent to 3 per cent. As a result, the policies led to greater savings than they cost to implement. Dancing Deer, a small baked goods company in Boston, put in place a stock‐option programme in which all employees participated. In one year, sales increased by 74 per cent and stock options increased in value by 40 per cent. The company also benefited from increased employee engagement leading to suggestions from lower level workers. In 2009, for example, the operations team identified an opportunity for significant savings by changing pans. Implementing the suggested changes resulted in eliminating excess waste, and realised $70,000 in savings from one suggestion alone in one year.

In addition to providing incentives for every aspect of production, Jenkins Brick, a brick manufacturer headquartered in Alabama, set up a profit‐sharing programme in which employees became vested after six years. Turnover decreased from 41 per cent to close to 20 per cent while productivity and product quality improved as a result.  In the US, average wages at Costco were approximately 42 per cent higher than those at their closest competitor, Sam’s Club, the wholesale branch of Wal‐Mart. Though Costco spent more on wages and benefits than its competitors, it also had higher annual sales per square foot ($795 versus $516) and higher annual profits per employee ($13,647 versus $11,039). Costco’s higher wages combined with opportunities for training and advancement led to lower turnover rates and higher quality service since employees were motivated and invested in the company. The higher quality service in turn led to high customer loyalty, with a customer base that included people willing to buy high-end items as well as continue to pay membership fees.

While our study focused on policies enacted by the private sector that improved working conditions, there is an important role for government to play in ensuring public reporting encourages and credits these changes. This role has become even more important given the current economic climate, with stagnant growth for large portions of the middle class and job loss leading to poverty for many workers.

As practices on Wall Street and in firms are being rethought, one of the areas needing a new approach is the reporting and evaluation of long term investments in employees.  The financial crisis has revealed numerous weaknesses in the systems by which brokers and analysts estimated the long term value of investments. When conducting our background research we were struck by how much managers we talked to in both private and publicly-held firms emphasised that having to respond to a stock market that rewarded short-term cost-cutting measures made it much more difficult to make long-term investments in workers. When it comes to evaluating firms, Wall Street and other financial centres have gotten in the habit of rewarding companies that cut wages, jobs, and benefits to employees and punishing those that do not.

The companies in our study showed that investing in their employees at all levels made economic sense. This is buttressed by other research on the productivity benefits of profit sharing, open book management and employee engagement – as well as the long term financial costs of unnecessary layoffs. Government has a role to play in shaping the required reporting so that companies can get the credit they deserve for making long-term investments.

Jody Heymann is professor in the Faculties of Medicine and Arts at McGill University and founder and director of the Project on Global Working Families

Magda Barrera is a research assistant at the McGill Institute for Health and Social Policy

For more information please see:

Heymann SJ with Barrera M. Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce. Boston: Harvard Business Press, 2010.