Many leaders believe they can’t afford to invest in their frontline employees. For them low pay, high turnover and poor service are necessary to make money and offer customers low prices. Just think of the outcry every time a government tries to introduce or increase a statutory minimum wage.
But what if I were to tell you that evidence shows that companies that invest a lot more than their competitors in their frontline employees deliver higher performance for both employees and customers, and ultimately for their investors?
In her new book The Case for Good Jobs: How Great Companies Bring Dignity, Pay and Meaning to Everyone’s Work Zeynep Ton, professor in the operational management group at MIT Sloan School of Management and co-founder of the non-profit Good Jobs Institute, demonstrates why a system built around low pay and high employee turnover is more expensive than leaders think – financially, competitively and ethically.
Having studied frontline-based organisations across the world, from retail to restaurants, hospitals to call centres and fulfilment hubs to factories, Ton argues that the missing element in discussions around low productivity is employee turnover. And this is largely driven by low pay.
Companies and employees are caught in a vicious cycle
“Every company is different but the path to success is not too different,” she says. “The mentality is that people are a cost that we should minimise. Many frontline businesses have low profit margins, so I understand why leaders want to minimise cost, but one place this shows up is low pay.
“What I have found is that low pay hurts people a lot more than we may think. When pay is low and people can’t meet their needs, oftentimes not sleeping, juggling multiple jobs, constantly stressing about whether they can pay rent that week, then everything else a company does, like belonging programmes or recognition programmes, is just a band aid, because low pay hurts workers and their ability to perform.”
Ton finds that pay is one of biggest drivers of turnover in frontline settings, and turnover is what drives this vicious cycle. Turnover goes hand in hand with attendance problems and understaffing and this then impacts operational issues. The result is poor service, goods not on shelves, lost sales and lost profits. The result? Organisations shrink labour budgets and the vicious cycle continues.
“The vicious cycle is expensive in its own right but also when companies operate in a vicious cycle of poor performance and high turnover their frontline managers are constantly fighting fires,” explains Ton. “There is no time to hire or to train their direct people and then organisations don’t want to empower their frontline people to make decisions. It’s a vulnerable system, an uncompetitive system and an inhumane system.”
How to set up a good jobs system
Many leaders want to provide good jobs but don’t know where to start. Ton says the good job system is not just about paying people more, it’s about winning with customers and investors. So what do you need to win? A strong team that you set up for success. Here’s how to create this:
- Invest in your frontline people as early as possible
The first core component of a good job strategy is investing in people. This, says Ton, means offering much higher pay than competitors, so that your people can live, can focus on their job and do it without mistakes. Ton says that when her team goes into an organisation they ask what percentage of their workers are making a living wage. And when the data is presented it’s eye opening. “There is often silence in the room and someone says, I had no idea that 65% couldn’t make a living wage.” So analyse pay data from frontline workers in terms of hourly wage and, importantly, number of hours. Look at how far away you are from the living wage and try to get as close as possible as soon as possible for as many people as possible. In addition you should offer strong benefits, stable schedules and career paths so people can move to higher paid positions.
Example: American membership-only retail warehouse club chain Sam’s Club makes $84.3billion in sales, has single digit margins and as a public company is constantly under investor pressure. Former CEO John Furner (now president and CEO of Sam’s Club owner Walmart) took what was seen as a risky step to invest in pay. Previous attempts to do this had not resulted in reduced turnover, but he believed this was because the other operational changes of the good jobs system had not been enacted. So the company made operational changes and started small – choosing a group of people to start with, giving them a %5-7 an hour rise – team leaders, bakery and meat specialists. This was sufficient to reduce turnover and improve performance, so the company could then invest more in pay. Since it started its good jobs journey in 2018 there has been a 25% drop in turnover.
- Focus and simplify
The ‘secret sauce’ when it comes to good jobs is the operation choices that position people for success and increase the productivity and contribution of these employees. Key to this is to simplify flow and work to ensure frontline workers can serve the customer well. Look at the work your frontline employees perform. What drives that work? Often companies are surprised because the work people perform is driven by store functions that have nothing to do with frontline work but head office choices. For example, frontline work at a restaurant is decided by menu choices, ingredient choices, whether they do home delivery and logistics choices. So look at which of these things really drive value for the customer and business . Which can you subtract because they don’t add value or are not necessary. Make decisions that don’t create variability to make it easier for the frontlines to serve the customer.
Example: Costco, one of the world’s largest retailers, pays workers $25 an hour - $10 an hour more than the typical retail employee receives. Most managers are recruited from within. One way they can do this while still offering low prices and making money is that they operate with a customised, smaller assortment, offering fewer products which enables employees to be more productive – i.e. they can stock shelves quicker and serve customers quicker. The resulting increased sales translates into higher wages.
- Standardise and empower
Traditionally, as Ton says, “headquarters thinks and frontline workers do.” There’s a rule for everything. Organisations with a good jobs system leverage the knowledge of frontline workers and pursue bottom-up continuous improvement. They create structures to hear employee ideas. Empowered workers can solve customer needs without asking permission, they can make decisions like ordering merchandise or open checkouts without needing to ask a manager. What is vital in this situation, however, is that employee turnover is stable so good decisions can be made.
Example: US American employee-owned pet store Mud Bay has knowledgeable frontline employees. It wanted to take a more consultative approach to selling while retaining its low price ethos. However, staff were working long hours, depleting their energy and impacting employee turnover rates. So they asked them what would help them to be more effective in consultative selling. Employees suggested stores were closed earlier because there was not much customer traffic after 8pm. When Mud Bay analysed the data they saw this wasn’t exactly true – there were significant customer numbers. So closing early would lose sales. However, it would also make life better for employees and create a better overlap between the morning and afternoon shifts. They listened to their people, reduced hours and sales increased. Since then hours have been reduced even more. Mud Bay’s employee turnover has dropped 35% in three years while sales per square foot have increased 25%.
- Cross train
To keep costs low companies often have employees either perform narrow tasks or ask them to cover more than they are trained or able to do. In good job systems employees’ productivity is maximised to foster a sense of ownership. So cross-train employees to do both customer and non-customer facing tasks so that they can adjust productivity to changes in customer traffic.
Example: Clinical laboratory industry company Quest Diagnostics had consolidated its 20 regional call centres into two in order to cut costs. These two centres were well over budget and delivering poor customer service. Three out of every five customer service representatives left in their first year. Turnover of 34% was costing %10.5 million a year in hiring, training and lost productivity. To tackle this Quest implemented the total good jobs strategy including cross training reps to handle more than one region to react to changes in customer demand. Together with the other operational choices this helped increase reps’ individual productivity and collective contribution to profits. In under two years employee turnover dropped more than 50%, absenteeism declined 12.4% and calls answered within 60 seconds went from 50% to 70%. Quest was no longer losing accounts because of the poor service. Despite investment in people, annual costs reduced $2 million.
- Operate with slack
Have more employees than the expected workload. Lean and mean is not efficient. If you have enough people to ensure shelves are always stocked you will get higher sales. If you have enough people you will prevent burnout, mistakes and poor customer service. Good jobs employers staff businesses with more hours of labour than the expected workload so that people can do their jobs without rushing and respond to customers even during peak times. However, you can’t operate with slack if you have slackers. You can only do this when you have invested in people and they show up every day.
Example: Spanish retailer Mercadona operates with 85% full time employees who receive schedules well in advance, even when customer traffic varies greatly throughout the day and week. These stable schedules result from smoothing out workloads, such as scheduling deliveries at times when traffic is likely to be low. It minimises last minute changes and simplifies processes. It operates with very low turnover of staff and empowers its frontline people. And, importantly, it operates with slack, meaning employees have time to make the right decisions, understand customer needs and solve their problems, communicate improvement ideas and find opportunities. So much so that, during the financial crisis of 2008, so many ideas came from the frontline that Mercadona was able to reduce its prices by 10%.
The good jobs system applies to any business that wants to win with its customers, says Ton. If you decide to be customer-centric then it is just natural to be frontline-centric, she says. The important thing to set up your team for success is to escape the vicious cycle as quickly as possible. The first step is to create urgency around this issue and make it about a business need to win with your customers. The second is to bring together head office functions that make decisions that drive the frontline.
“Those who changed successfully viewed this as vital to tackle an existential threat,” says Ton. “If you do subtraction and investment in people simultaneously you will benefit.”
And if you don’t? Employers struggling to fill job vacancies will see labour costs rise with no improvement in employee turnover or productivity. In that context, taking the first steps towards being a good jobs employer is the only sustainable path.
Zeynep Ton, pictured below, is a professor of the practice in the operations management group at MIT Sloan School of Management and president of the non-profit Good Jobs Institute. Her book, The Case for Good Jobs: How Great Companies Bring Dignity, Pay & Meaning to Everyone’s Work, is out now.
