Raising Productivity and Profitability With Better Working Conditions for the Worst-off
Questions that Converge
Profiting Together answers three fundamental questions. First and foremost, the book answers C-level executives and other senior managers who are asking themselves: Are there additional ways to increase my company’s success? The case studies answer young business leaders who are wondering: Can I spend a career profiting in the private sector while bringing benefits to others? At the same time, this research answers the questions raised by labor representatives and all levels of employees: Isn’t there a way for the company and I to succeed together?
These three questions have long been central to the lives of everyone from senior managers in the largest companies to entry-level employees in the smallest firms. CEOs, CFOs, COOs, and other leaders have always had to worry about profitability. The shareholders and board members to whom they report measure their success in this nearly singular way. Wall Street has frequently evaluated firms’ prospects as rising when leaders cut jobs, wages, and benefits. At the same time, in their personal lives, top managers’ satisfaction has long stemmed from being able to achieve more than profit at the cost of their employees. Moreover, while employees have always cared about companies’ competitiveness because it assures the long-term stability of their jobs, they clearly also care about the quality of their working conditions, compensation, and daily lives.
While these priorities are perennial, the economic crisis, which began in 2008 and 2009, has crystallized the urgency of being able to answer these questions simultaneously. As the meltdown over the AIG bonuses made clear, two crises have been wrapped into one: an economic crisis and a crisis of confidence in corporate America. The questions raised by the economic crisis are clear: When will firms become profitable again? When will we begin to find economic security? Will the United States, Europe, and other advanced economies be able to repair themselves? How long will it take for China, India, and other emerging economies that were dependent on the United States, to rebound? All of these concerns surround economic success. But as demonstrated by political outcry, demonstrations, and rapidly written legislation, the crisis in confidence has been equally critical and has presented a different set of questions: How “greedy” is Wall Street? Are leaders of the private sector just out to ensure their own personal financial success and are they willing to risk the financial security of everyone else in the country? Is there any reason to believe that average Americans will stand to gain by bailing out companies or by ensuring corporate success? All of these questions come down to the fundamental one: Will there be a link between the success experienced by those at the top of the corporate ladder and those on all of the other rungs?
Profiting Together tells the story of companies around the world who have found ways to answer both sets of questions simultaneously. These companies have been profitable for their owners and shareholders not only while being profitable for their employees, but because they have been profitable for their employees.
Working Conditions that Matter
They have been able to do this for a simple reason. How work is structured, how it is rewarded, the ways workplaces encourage employee engagement are all central to the profitability of firms and to the quality of the daily lives of working men and women. Employees determine 90% of most businesses’ profitability.
Often under-recognized is the fact that the most potent impact can come from employees situated at the bottom of the corporate ladder. In call centers, it is the employees answering the phones that determine the quality, pace, and effectiveness of the company’s responses to customers. In maintenance and repair industries, it is the men and women who take the calls and carry out the services who again determine customers’ satisfaction, patronage and loyalty and whether they recommend the company to others. In manufacturing, workers on the factory line leave their fingerprints on the quality of the products and determine the error rate in production. Even in wholesale and resale, success fundamentally relies on the quality of the work carried out in the warehouses and of the interactions between employees and customers.
The caliber of the employees that a company can attract and retain and the quality of their performance are affected by the company’s working conditions, including wages, benefits, work-schedules, flexibility and leave, support for health, and policies surrounding participation in planning and work design. These policies simultaneously have implications for the company’s bottom line in terms of costs and benefits. For years, in evaluating publicly traded companies, Wall Street has focused nearly exclusively on the costs of the provision of decent working conditions. CEOs have been pressured to cut compensations, with little consideration being given to the long-term consequences of doing so.
Just as the quality of a firm’s jobs is essential to a firm’s success, it also plays a fundamental role in determining the quality of the lives of working men and women. Working conditions’ influence includes the fairly pragmaticdetermining if a worker loses his job when he has to take time off after a heart attack; if a father loses pay when he stays home to care for a sick child; if a daughter loses wages when she misses work to care for an aging parentto the more ephemeral, but equally fundamentaldetermining if employees find their work meaningful and are eager to do their best at their jobs.
While the question of how much to invest in employees and what kind of investment to make has long been essential to companies, they are particularly critical given the economic conditions in 2009. As the economy spirals downwards, firms are particularly concerned about finding ways to cut costs in light of declining consumer spending and revenues. It is natural for them to wonder whether they can cut costs by lowering wages, decreasing health and other benefits, and limiting support for pensions. As companies restructure in response to economic threats, it is not surprising that employee engagement is sometimes the last thing on their minds. Yet, the role of employees is more important than ever in ensuring companies’ success in surviving the downturn. Companies are dependent on employees to be particularly flexible as they restructure, to cover for laid-off employees, and to find new ways to cut costs and increase productivity. At the same time, in the face of the bursting housing bubble and the dramatic drops in the stock market in 2008 and early 2009, the declines in employees’ savings have often been even greater than the declines in companies’ assets. This has made it all the more important to employees to have a secure job with a living wage and adequate benefits that prevent income-loss due to illness or the birth of a child.
This book addresses the fundamental question: is it truly financially beneficial for companies to cut wages and benefits and limit provisions for flexibility, or is there a path forward from which companies can profit financially alongside their employees?
Our Research Program
For over a decade and a half, I have led a research program, first at Harvard and then also at McGill, examining working conditions around the world. For the first decade of this program, my research focused on understanding the working conditions faced by working men and women globally, and how these working conditions varied across political, social, and economic contexts. While analyzing the differences across countries, we also examined the differences within countries across classes and socio-demographic groups. In the United States, we studied the experiences of over 10,000 working Americans, including men and women in every state, across all income levels, and in every sector of the economy. These studies included looking at the impact of the working conditions on the employees, their families, and their communities. We carried out large national studies; studies that focused on the lowest-wage workers; studies that compared the experiences of workers with limited education to experiences of professionals; studies that included in-depth interviews of multiple family members; and studies in which individuals were contacted daily to inquire about the relationship between the conditions they faced, the work they performed, their daily lives, and their personal health and welfare as well as that of their families.
We then carried out similar studies around the world: we interviewed working adults in the largest city and in a small rural town in Mexico; examined the experiences of immigrant families split across the Mexican-U.S. border; researched working conditions in Botswana, a particularly strong democracy and economy in Africa that has been hit hard by the AIDS pandemic; spoke with workers in Russia about the conditions they faced as the country moved from a centralized to a market economy; carried out research in Vietnam as the Vietnamese economy opened up under Doi Moi to the international market, and in both Vietnam and Cambodia as these countries walked the long road of economic recovery after the devastation of wars.; and learned about how working conditions influenced the experiences of individuals and communities in Honduras that had survived a major natural disaster, Hurricane Mitch, which destroyed many neighborhoods in the capital, Tegucigalpa. In the end, our studies of working conditions included analyses of over 55,000 households, and working men and women living on all six inhabited continents.
These studies brought to light the many dimensions of disadvantage at work around the world. Those with the least amount of formal education not only received the lowest wages, but their jobs also offered the least scheduling flexibility. These workers were the most likely to be fired if they were sick, to lose their meager yet crucial income surrounding the birth or adoption of a child, and to face untenable choices between caring for a sick family member and earning enough money to survive. They were also the least likely to have any autonomy at work, to participate in planning or design or to have their voices heard within the company. These initial studies delineated the conditions workers faced around the world. Over the past nine years, we have increasingly been focusing on finding and understanding solutions for reducing these disparities, and for four years we have been studying initiatives in the private sector. The findings from these studies of companies in nine countries are detailed in this volume. We also examined the relationship between public sector policies and countries’ economic competitiveness; our analysis of public policy in 192 nations is reported in Raising the Global Floor.
Research on Business Strategy
We began a study to see if we could find companies who managed to have good working conditions for all of their employees, including those at the bottom of the corporate ladder. We used a wide range of tools to identify these companies: we solicited the recommendations of company CEOs and other leaders in the business community as well as civic leaders who focused on labor issues; we analyzed a series of published lists of the “Best Companies to Work For” to see how many of them managed to have good working conditions for all of their employees, as opposed to only for the professionals or highest-paid employees; we analyzed the companies that were generated by expert opinion to see if their good working conditions permeated all levels of employees, and we assessed their financial profitability.
Many companies were eliminated from our original list. The majority of the firms that were lauded as being among the “Best Companies to Work For” focused their efforts only on the employees at the high end of their corporate ladder; their policies were either unaffordable or unavailable to their line workers. Among the companies recommended by experts as being particularly innovative, some fell off our list because they were new and had yet to turn a profit, although they showed great promise. After winnowing down a list of hundreds of potential companies, we selected a final list that represented diversity in geography, size and sector, and that included both publicly traded and privately owned companies. Geographic diversity was one of our main concerns, given that we wanted to assess whether the financial advantages of offering good working conditions and benefits were translated throughout a globalized economy, in which companies had to compete with firms around the world. We therefore wished to study companies in diverse geographic locations that managed to ensure good jobs for all their employees. We also wanted to include businesses of every size, since companies of different sizes face very different challenges and constraints in seeking to establish good working conditions. The companies we selected represent small, medium and large firms employing between 27 and 126,000 men and women. While compiling the list of companies selected for study, it became clear that most of the firms featured were privately-held. Many publicly-held companies do have good working conditions, but they often employ mostly high-wage workers or offer different levels of working conditions and benefits to management employees than to workers at the bottom of the ladder. In order to ensure that the study included both publicly traded and privately held companies, we made extra efforts to locate publicly-held companies that fulfilled our criteria. Finally, we wanted the companies we studied to represent different sectors. We felt that both retail and manufacturing sectors had to be included since they account for so many of the jobs available to workers with lower levels of formal education.
When we approached companies to study them, we asked a lot of each company. We told them that we would need to interview employees at all levels of the company, from the lowest-paid workers to those in top management positionsin most cases the CEOs, CFOs, and COOs. We would need to speak andidly with employees about their experiences, guaranteeing them confidentiality and privacy so that they would feel free to speak openly and honestly. Companies knew that we would use this information to publish a study and that we would have the final say on the description of their company, since this was the only way that readers could be guaranteed an independent opinion and that we could ensure academic integrity. In spite of all our requests, and undoubtedly in large part due to the fact that the companies had faith that their actions would withstand scrutiny, all of the companies we approached agreed to participate, with only one exception. This company had initially agreed to take part, but was then bought out by another company whose reputation for working conditions was far more mixed; they were worried about participating in a study that might look closely at employees’ experiences and at their relationship to profitability.
Our site visits and interviews were designed to determine whether these companies’ working conditions were as good in practice as they were on paper, as well as what, if any, relationship they bore to the firms’ productivity, financial costs, and returns. We carried out at least two site visits at every company we studied. A member of the research team conducted a complete set of initial interviews, gathered publicly available information on the company, visited the work site, and analyzed the data. I then carried out a follow-up visit to every company, again interviewing everyone from line workers to top management, and assessing sources of potential successes as well as challenges the companies faced and limitations on their accomplishments.
Each of the companies profiled in this book has demonstrated a remarkable accomplishment in at least one of the areas we focus on in each chapter. While a number of companies could have been highlighted in several chapters, we tried to vary the companies selected to enable readers to learn about practices in a range of business sectors and geographic locations. Some of the companies are far stronger in their practices in one area than another; this is natural, and perhaps no less surprising than the fact that top athletes are typically far stronger in one sport than another. The companies are highlighted for their accomplishments in the appropriate chapters, and honest assessments of the limitations of these accomplishments are also included. This book does not rate each of the companies across all areas treated in the book and is not meant to suggest that any individual company is perfect, but rather to examine the impact that good working conditions have had on each companies’ success and on workers’ quality of life.
To these studies we brought the skills of a research team, objective eyes to examine what was working at the company and what wasn’t, the time to conduct detailed interviews with a wide range of players, the ability to be seen as independent by CEOs and workers alike, and a commitment to spend the time required to analyze the evidence. While we did not bring a background in business, this gave us the advantage of neutrality; we weren’t seen as representing shareholders, company executives or employees, as we almost inevitably would have been had we come from a particular position in the business community. This allowed us to elicit full and far less censored stories from factory workers and chief financial officers alike. As researchers, the time we were able to invest in this study over four years also allowed us to examine what worked in the companies and what didn’t with a degree of detail that would have been hard for anyone to achieve while simultaneously running their own company.
Researchers always begin their studies with hypotheses. When we started this study, we thought we would find companies that had managed to provide good working conditions while succeeding economically, but we had also assumed that there would be no causal relationship between the two. We knew that researchers had been able to demonstrate the financial gains that companies could achieve by investing in high-skilled workers. But these demonstrations of financial gain largely relied on how much companies stood to gain by not losing employees who are particularly expensive to recruit. We realized that when unemployment was particularly low, companies might also stand to gain by establishing policies and practices that helped them recruit workers into so-called ‘low-skilled’ jobs. In areas where there were moderate levels of unemployment, however, it was less clear that companies would experience these gains. Moreover, the fact that the majority of companies cut benefits and slowed wage growth whenever possible suggested that they thought it was economically advantageous to do so.
Over the course of our four-year study, we went from believing that it was possible for companies to improve their working conditions while being profitablesomething we cared about for clear reasons of humanityto realizing that the majority of the companies we studied had increased their profitability by investing in their employees at the bottom of the ladder. The rhetoric insists that this simply can’t be done, claiming that companies can’t treat employees as well as they used to if they want to make money; that scheduling flexibility isn’t possible in manufacturing; that providing training for employees with limited formal education is not profitable; that employees with special needs are a drain on finances; and that employees at the bottom of the ladder can’t significantly contribute to improving the quality of a company’s products. The companies we have chosen to focus on in this book have disproven all of these claims.
A note on terminology used in the book seems necessary here. There are many commonly used ways of referring to workers at the lowest level of the corporate ladder. One of the most frequently used terms, ‘low-skilled workers’, will only be used when it is referenced from the literature or from our interview subjects; our case studies clearly demonstrate that in fact these workers have many important skills, even if they have limited formal education. We also decided against using another common term, ‘low-wage workers’, since the best companies have made sure that all of their workers receive a living wage, and in some cases also have opportunities to earn substantial wage increases and financial assets. Because of this, we have elected to use the terms employees at “the bottom of the ladder” and “least-advantaged workers” to reflect the situation of the workers featured in this book. We also refer to ‘least-educated workers’, since having a limited formal education is most often the biggest constraint on people’s ability to move up the corporate ladder.
Various tools are available to assess causality. Basic scientists can do so by conducting experiments. For example, if chemists want to know what occurs when two chemicals are combined, they mix the chemicals, place them under heat or pressure or another force to combine them, and measure the outcome. If physicists want to know what happens when atoms are smashed, they build an accelerator, run the atoms through it, and measure the outcome. If physicians want to determine a drug’s effects on patients, the gold standard is, similarly, to run an experiment in which patients are randomly divided in two groups, one group receiving the real medication and the other receiving an identical-looking placebo. In most cases, we don’t have the luxury of using experiments to determine causality in public policy. This also applies to businesses, since CEOs who are responsible for turning a profit are not likely to voluntarily turn their companies over to a scientific venture in which they would be randomly assigned to either implement or abstain from adopting a major policy.
This does not mean, however, that we cannot examine evidence to determine if it is strongly suggestive of an action leading to a given impact. Instead of using randomized experiments, we examine other criteria that are often used to suggest causality. We can ask the following questions: What action was taken? Was it implemented well? Is there a clear mechanism by which this action could lead to the anticipated results? Did the sequence of events strongly suggest that the action led to the impact? And so on. In short, we can employ the types of questions that scientists and other researchers use outside of the experimental environmentand that indeed all of us use to try to determine causality in our daily lives.
For example, if my neighbor throws a baseball in Boston and there is a death from AIDS in Botswana, I assume there is no causal link between these two events since there is no known mechanism by which throwing the baseball would lead to the death from AIDS, and there is little evidence of a relationship between this small action in Boston and major events in Botswana. Although chaos theory might suggest possible ways in which a butterfly flapping its wings in one location could lead to a hurricane in another, in our everyday lives we assume that there is little if any causality between these distant events. Similarly, if I see my next-door neighbor throw a baseball and my neighbor a block away complains of having a broken window, I may be reticent to assume that there was any relationship between these events; while baseballs can break windows, and while the fact that my next-door neighbor carelessly threw one today might suggest that he could have thrown one carelessly a block away a week ago, we still have no way to delineate this relationship. But, when I watch my next-door neighbor throw a baseball and I see it go through our front window, I am ready to conclude, without conducting a formal experiment, that throwing the baseball led to the window breaking. Of course the window could spontaneously have broken for some other reason, but this seems highly improbable. Throwing the baseball preceded the window breaking in tight sequence, and there are plenty of mechanisms by which we know that baseballs can break windows. As clear as I would be about causality in that case, a number of the CEOs we interviewed in this study were equally convinced about the causality of their actions and policies leading to higher profitability.
Their degree of conviction arose for a number of reasons. In several cases, the CEOs had taken over companies that had high turnover rates and a poor ability to attract or motivate workers; the CEOs had improved the companies’ working conditions, and as soon as they did so, they observed an increased ability to attract and retain employees. As in the case of observing the baseball break the window, the sequence of events was clear and the mechanism was natural. Furthermore, the employees often supported the causality by relaying specific details about how the improved working conditions had led them to apply for a job at the company, to remain there, and to work more efficiently.
Companies Are Not Catastrophe-Proof
In 2009, we are facing the worst economy the world has seen since the Great Depression in the early twentieth century. Some of the world’s oldest and most successful companies have already failed in light of this downturn. In this setting, it is natural to wonder if some of the companies profiled in this book will also go under. While we hope they will all survive because we are profoundly impressed by each of them, we recognize that there is a real probability that some of them will not weather the storm.
No company is catastrophe-proof. While investing in working conditions can substantially strengthen a company’s profile, no single set of actions can create an impermeable barrier against the inherent risks in different sectors in a global economy, which have recently been dramatically heightened. While we cannot say that all of these companies will remain financially successful, our research clearly demonstrated that the working conditions detailed in this book substantially contributed to these firms’ financial success. The working conditions at the firms we studied either during economic downturns or when entire sectors were threatened had provided them with crucial tools that markedly increased their chances of survival.
Capitalists Not Kantians
Some of the top managers we interviewed were as driven by moral principles as any philosopher would be, however, they all saw profit-making as one of their top duties. For others, making a profit was their sole focus. They had little time or interest in engaging in debates about determining the “right thing to do” if it wasn’t driven by the balance sheet. We were delighted to be able to include companies that were overwhelmingly driven by profit. In fact, when public questions were raised about the character of one or two of the senior managers in our study, we were asked whether their companies should be dropped from the book. Our goal, however, was the opposite of simply selecting saints. We welcomed including senior executives whose actions were solely motivated by making money. Kant argued that to act morally, one’s intentions are important, and that one can’t act for personal benefit. In this sense, this book is fundamentally capitalist, not Kantian. We believe that companies can invest in improving the conditions of the people at the bottom of the corporate ladder purely because they want to be more profitable. We would be delighted to see the world become a better place for the people at the bottom of the ladder while increasing profits for employees and companies alike.
Changing the lives of employees at the bottom of the ladder while becoming more profitable is exactly what the companies in Profiting Together have done. Their approaches, which include raising wages, rewarding productivity with strong earnings and profit-sharing opportunities, providing paid leave and flexibility, providing health care, and many others, are frequently devoted to professional employees and workers situated in the middle and at the top of the corporate ladder, yet they are truly rare for the lowest-level workers. To take just one example, profit-sharing is available to less than 1% of those in low-level jobs.
Some of these practices are rarely applied to the lowest-level jobs because they present unique challenges in certain settings. How, for example, does one provide scheduling flexibility in manufacturing jobs without hindering production? Other practices, such as providing good wages, have not been applied because it is assumed that it is impossible for companies to succeed economically if they ensure these fundamentals for all of their employees. The companies described in this book make clear that it is feasible, affordable, and transformative to improve the working conditions at the bottom of the corporate ladder.
Profiting Together details how a brick manufacturer in the Deep South of the United States and an apparel manufacturer in Los Angeles dramatically increased the wages of their laborforce while increasing their productivity. The book shows how profit-sharing increased the productivity of a box manufacturer in British Columbia and a cookie manufacturer in Roxbury, Massachusetts. It tells the story of how investments in health care provision at a scrap metal company in AIDS-ridden South Africa and at a cement manufacturer in rural India made these companies more profitable in the long run. It presents the benefits reaped by a roofing manufacturer in Norway that provided training to its employees as it mechanized production, a bank in Peru that hired autistic and developmentally delayed adults, and a call center in Ireland that provided advancement opportunities to everyone working the phones. Through these detailed case studies, the book illustrates how and why those at the bottom and the top of these companies report that they profited together.