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World Changing Ideas

Can Treating Low-Wage Workers Well Become The Hot New Business Strategy?

Aetna, Gap, Starbucks—even Walmart—are making moves to pay and treat their employees better. Are we seeing the start of an age of friendlier big business, or is it all just PR?

[Illustration: Eric Palma for Fast Company]

In the auditorium of a drab office building Jacksonville, Florida, almost 200 employees of the health insurer Aetna gathered—with many more following along on a live video stream—for a visit from the CEO this January.

They were there expecting a town-hall-style Q&A. What they got instead was an emotional surprise, at least for the lowest-paid among them: CEO Mark Bertolini announced that everyone who earned less than $16 an hour would get a raise. Those same employees, most of whom worked in customer service and claims processing—and most of whom were women—could also choose less expensive health benefits the following year.

"When you look at it you say, wow, we are a Fortune 50 company and we have employees who are on food stamps and putting their kids on Medicaid. Does this work? Is this fair?" Bertolini told Fox Business News, speaking from Davos in January. The pay raise would affect 5,700 of Aetna’s employees, or about 12% of its workforce.

The Defining Challenge Of Our Time

Aetna is among the latest of many large brand name companies to step up pay and benefits for their low-wage employees. Gap and Starbucks both made headlines when they made similar announcements in 2014. The biggest news came in February when Walmart—a company with a reputation for particularly low pay and poor treatment of workers—announced it would increase wages for 500,000 employees to $9 an hour this year and $10 an hour by 2016.

These moves are happening as America focuses on income inequality like no time in recent memory. Last year, Seattle broke new ground by passing a new minimum wage at $15 per hour—a pay level set to what it actually takes to afford basic living in the city—which will be phased in over several years. Meanwhile, workers and organizers are fighting campaigns around the country to increase federal and state minimum wages, which at today’s meager levels often consign hard-working families to poverty. In a December speech, President Obama called growing inequality the "defining challenge of our time." It’s telling that at one point, as Bertolini began considering the issue of pay for his lowest-wage workers more than a year earlier, he asked his executives to read "Capital in the 21st Century," Thomas Piketty’s controversial 2013 blockbuster on inequality.

What's happening today is arguably the flip-side of the Occupy Wall Street movement that focused outrage on the nation’s wealthiest top 1%, says Paul Argenti, a corporate communications and corporate social responsibility expert at Dartmouth College’s Tuck School of Business. "This isn’t just about bankers, and how much they make. What bankers make is ultimately insignificant to most Americans. It’s about 'What am I going to make?'"

But for companies like Walmart, Gap, and Aetna, decisions to improve worker pay, benefits, and hours are as much a benefit to their own bottom line as their employees. In fact, for these large public companies, the ethical arguments are likely besides the point. And in the case of Walmart especially, there's debate about how much its workers will really benefit from the raise. What's clear is that more and more businesses are beginning to discover that the economic benefits of better treating their low-wage workers outweigh the savings gleaned from paying them less.

The Good Jobs Strategy

When she was doing work towards her PhD more than a decade ago, Zeynep Ton, now a professor at MIT’s Sloan School of Management, didn’t study jobs—she studied efficient supply chains in the retail sector. But she reached a surprising conclusion: Even companies that did everything possible to get the right product to the right store at the right time tended to dropped the ball at the end. A shelf might be empty while stock sat in the back room or in the wrong part of the store. (This shouldn’t be news to any regular patron of big box retailers.)

"Retailers find themselves in this vicious cycle because they have this mentality that labor is just a cost," says Ton. Stores were often understaffed or—because turnover was high—were staffed with people who were poorly trained, new, or unmotivated. "The conventional wisdom is that this is the only way to operate in retail," she says.

She started looking for exceptions to the rule—stores that still excelled in price-sensitive industries, but managed to treat their workers far better than competitors. From Southwest Airlines, Trader Joe’s, and Zappos to In-N-Out Burger, Quiktrip, and The Container Store, she found that the small handful of companies that paid, trained, and treated workers well were also the companies with staff that were the most motivated and capable in their jobs, loyal to their employers, and likely to go above and beyond for customers. Costco, for example, starts its workers at a wage of $11.50, has an average wage of $21 an hour, and provides almost 90% of its workers with health insurance, according to a profile in Businessweek. In-N-Out burger offers its full-time service employees a 401-K plan and paid sick and vacation days.

Using what she called this "good jobs strategy," these companies often achieved a "virtuous cycle" of higher customer satisfaction, better employee retention, and other long-term results that increased profits and made up for higher wages. According to Ton’s research, the convenience store chain QuikTrip saves money with its far lower full-time employee turnover compared to other top companies in the industry (13% vs. 59% at the time). In another example, she found that Costco’s sales per employee were almost double Walmart-owned Sam’s Club’s. Last year, employees of the New England grocery store chain Market Basket proved perhaps the most dramatic example of her management theory: They loved their CEO so much, they walked off their jobs to save his (and many loyal customers followed them out the door).

One of the other major benefits to businesses may be more intangible. Companies never used to make a big deal when they gave workers raises, says Argenti. Today, they make announcements, burnishing their reputations for being socially responsible brands.

Given all of this context, Aetna’s decision to boost pay and benefits for customer service staff seems shrewd—especially as health insurance becomes a more consumer-oriented industry in the era of Obamacare. Also smart is Gap's announcement last year that it would raise wages for all employees to at least $9 an hour in 2014 and $10 an hour by June 2015—a change it says will affect 65,000 hourly workers and one it sees coming up the road anyway through future laws that raise wage minimums. Walmart’s recent raise decision, which it said would cost it $1 billion this fiscal year (Walmart had $485 billion in revenue in fiscal year 2015), was considered at least a partial victory for labor activists, many of whom want a livable wage of $15 an hour. But it was also completely understandable from Walmart’s business perspective: As the economy improves, Walmart faces more competition for new hires and has a bigger incentive to reduce turnover. (The company also employs so many low-wage workers, it actually boosts its own sales when it pays its employees more.)

Of Gap’s decision, Senior Vice President of Human Resources Dan Henkle says: "It was that combination of looking at what was happening out there, and looking at our own talent proposition, and saying, 'How do we strengthen our position in the our industry?'" Since its announcements, the company’s job applications have increased by double-digit percentage points, he says. And it got its public image boost as President Obama, as the nation’s Shopper-In-Chief, visited a New York City store shortly after it announced its decision last year

Whether these companies are truly adopting Ton’s good jobs strategy, however, remains to be seen. She notes that it’s a hard thing to do, especially for companies that haven’t been using it from the beginning. Shareholders with a short-term outlook may not be pleased, as The Container Store found when it went public and saw its stock hammered amid complaints it was spending too much on its workforce.

To use the good jobs approach strategically, companies need to not only pay employees more, but also restructure work to maximize each person’s productivity. It’s not just about better pay—or even better benefits—but also smarter management. Irregular, unpredictable, and just below full-time hours have been a big criticism in both retail and fast food, and a major issue targeted by the recent fast food workers strikes. To a worker who can’t predict how many hours she will receive or when she will receive them, a $1 or $2 per hour pay raise might not help improve morale.

This is why, even if all companies start to raise their wages, some will see bigger business benefits. "Some will be able to design the work much better than others," Ton says. "There is something called management capability."

The Unseen Workers

It’s one thing for a company to make the business case for higher wages to staff who directly affect the customer experience. It becomes harder the further removed the employees are from public view, such as workers in the U.S. packing warehouses for online retailers or the garment factories in Bangladesh, where one facility that worked for many U.S. clothing brands disastrously collapsed in 2013, killing more than 1,000 workers.

The example of Silicon Valley is telling. Google, Apple, Facebook, and other firms are famous for the lavish perks they shower upon employees, but the region’s janitors, bus drivers, cooks, and security guards—who tend to be contract workers—are not given the same sweet deal. One-third of all households in Silicon Valley don’t make enough to get by and many don’t get basic benefits like paid sick days, according to Ben Field, executive officer of the South Bay Labor Council. Inequality is only growing as housing prices rise.

Ethically, it’s clear why cash-rich tech companies should treat their workers better. By creating bad press around the issue, activists and labor organizers like Field are trying to make it a bigger practical issue as well. Field argues that it’s good for everyone in the region if full-time workers can support themselves, rather than relying on local government services that drain the taxpayer’s budget. The bigger picture, he says, is nothing less than a "battle for the soul of Silicon Valley."

There are signs tech companies are starting to listen. Google, for example, recently dropped a contractor, Security Industry Specialists, known for low-pay and irregular hours and hired 200 security guards as full-time staff instead. Facebook’s bus drivers recently voted to organize with the Teamsters Union. But Field believes regulation, like Santa Clara County’s new law giving all county employees and contractors a living wage of $17 an hour, is the more comprehensive answer.

Argenti, the corporate communication expert from Dartmouth, suggests it would be to the tech companies’ benefit to get with the program before they are forced to do so. If activists do a good job, the Silicon Valley contract worker situation will start to look pretty bad for tech companies’ reputations.

This points to the larger question about how we will address income inequality: There may be a growing business case for some companies to re-think how they treat their low-wage workers, but that’s not happening in all industries. What’s more, the "good jobs" strategy won’t work for every company, and pressure from labor organizers and communities often falls on deaf ears. But for society, the consequences of not addressing the growing number of hard-working people who live in poverty are large, including increasing burdens on social services and a decreasing motivation for people to find work at all.

"Plato said no one should be worth three times more than anyone else. When you’re getting, not the CEO, but a software developer worth six times what a janitor is making—there’s something wrong with that," says Argenti.

Related: Should Interns Be Paid?

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