High pay rates reduce costs?!

You bet they do.

Specifically, paying workers well can reduce overall costs and boost profits, says a professor at Sloan School of Management (MIT).  

Dr. Zeynep Ton has spent a decade studying the argument that low-price retailers have to cut their payroll costs to the bone to stay competitive. She says it ain’t so.

“The assumed trade-off between low prices and good [paying] jobs is a fallacy,” she says.

Ton points to successful retail chains like Quik­Trip convenience stores, Trader Joe’s supermarkets, Costco wholesale clubs and Mercadona (a Spanish grocery chain).

These companies pay above-average wages and benefits, invest heavily in training and promotion from within, and empower their employees. They also are low-price leaders in their industries, and they have good financial performance and customer service that puts their competitors to shame.

Ton says “They have demonstrated that, even in the lowest-price segment of retail, bad jobs are not a cost-driven necessity but a choice.”

It’s a mindless choice that too many corporate executives make when they act on the assumption that payroll and employee development expenses are simply costs, and ignore the opportunity to think of good pay and good benefits and employee empowerment as an investment in efficient operations, good marketing and good customer service.

Costco’s front line employees make about 40% more than their counterparts at Walmart’s Sam’s Club. Trader Joe’s starts its full-time employees at $40,000-$60,000, more than double what some competitors pay—and sales per labor hour at Trader Joe’s are 40% higher than those at the average American supermarket.

Labor typically is a retailer’s largest controllable expense and may amount to more than 10% of revenues. Often store managers have much more control of their payroll and related expenses than they do of their merchandise mix, store layout, pricing and promotions. The result is that store managers under pressure to meet periodic profit goals often turn first to minimizing their payroll/benefit expenses, “even though they knew that the workers who remained would cut corners and make mistakes…and they suspected that this could hurt sales and profits.”

Dr. Ton says bluntly that boosting wages and benefits can geometrically increase revenue and profits. She cites a major retailer’s finding that every $1 increase in payroll resulted in a $4-$28 increase in monthly store-level sales.

Among other operational benefits, boosting pay/benefits and empowering employees reduces very costly staff turnover. Mercadona has an astounding 4% annual turnover, Costco’s turnover rate is 5.5%, Trader Joe’s is 10% and QuikTrip’s is 13%. One recent study reported that average turnover of retail hourly employees nationwide was 22%. Another more recent study (September 2014) says that turnover among part-time retail employees was almost 75%.

The failure of so many corporate execs to spend more money investing in and training their employees is short-term thinking at its worst, inimical to profit growth, a guarantee of poor customer service and a clear impediment to building shareholder value.

Why do they blindly continue to offer low-paying jobs and crummy working conditions?

Hint: there aren’t enough good managers to fill all the management slots.

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Copyright © Richard Carl Subber 2015 All rights reserved.