Low pay is obviously terrible for workers, but a growing body of research proves that it’s bad for businesses, too. Smaller paychecks lead to higher turnover, decreased productivity, and poor sales. Will low-wage employers in the grocery, retail, and restaurant industries ever understand that their employees are their most important asset? Zeynep Ton hopes so. She’s written a book explaining how labor investments can pay for themselves, and she joins us today to explain why better-paying jobs are good for everyone in the long run.
Zeynep Ton is a Professor of the Practice in the Operations Management group at MIT Sloan School of Management. She is also president of the nonprofit Good Jobs Institute, where she works with companies to improve their operations in a way that satisfies employees, customers, and investors alike.
Twitter: @zeynepton
Good Jobs are Good Business https://time.com/6285516/good-jobs-good-business
The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work https://store.hbr.org/product/the-case-for-good-jobs-how-great-companies-bring-dignity-pay-and-meaning-to-everyone-s-work/10579
Website: https://pitchforkeconomics.com
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Nick’s twitter: @NickHanauer
Nick Hanauer:
There’s an obvious argument that if you treat people well, it’s good for them. We make the argument that when you treat people well, when you pay them more, it’s actually good for the economy.
Zeynep Ton:
A good pay doesn’t guarantee a good job and low turnover, but low pay guarantees high turnover.
Goldy:
There’s actually a competitive advantage to corporations creating good jobs. By that we mean not just treating your workers well, but paying them well.
Speaker 4:
From the home offices of Civic Ventures in Downtown Seattle, this is Pitchfork Economics with Nick Hanauer, the best place to get the truth about who gets what and why.
Nick Hanauer:
I’m Nick Hanauer, Founder of Civic Ventures.
Goldy:
I’m David Goldstein, Senior Fellow at Civic Ventures.
Nick Hanauer:
Goldie, today on the pod we get to talk to a really super interesting woman named Zeynep Ton. She has been beating the drum on a subject that I care a lot about, have always cared a lot about, the business reasoning for treating people well. I really believe that the business world is bifurcated between two kinds of operations. This is an oversimplification, but on the one hand, there are the low road employers run by jerks and sociopaths who treat people like chattel and who try to pay as little as they can possibly pay. And-
Goldy:
The people we’ve called parasites.
Nick Hanauer:
Yes, all those folks. And on the other hand, there are people who believe that their people are their biggest asset and invest in them and build cultures of incredible integrity, intentional integrity, and trust. My view has always been that the latter massively outperform the former, because while it is possible to be a low road employer or a parasite and make money, at the end of the day, the high road employers tend to be the most successful enterprises. The truth is, you have to be a particular kind of personality to run one of the low road employers. If you actually care about people, it’s very difficult on a day-to-day basis to treat them terribly. If you don’t care about people, of course it’s no problem, and we see that everywhere in American business life.
The high road always seemed both more logical and emotionally preferable to me. Zeynep, she spent a career analyzing this stuff and helping people move from the bad way to the good way. I really do think she is onto something very, very important and something that needs more and more attention, particularly given the challenges in the economy today.
Goldy:
Right, that there’s actually a competitive advantage to corporations creating good jobs. By that we mean not just treating your workers well, but paying them well.
Nick Hanauer:
Goldie, you and I make the argument… Well, I mean, the traditional argument, of course, is always that treating people well is good for the people, right?
Goldy:
Right. If we can afford to do it, of course, Nick, because we can only afford to treat workers well when there’s economic growth. You can only get that by cutting taxes and wages and regulations.
Nick Hanauer:
Exactly. No, but there’s an obvious argument that if you treat people well, it’s good for them. We make the argument that when you treat people well, when you pay them more, it’s actually good for the economy, that the more money people are paid, obviously, the more they have available to spend, which is where economic dynamism comes from. Zeynep is making a different version of this argument, which is it’s actually good for business, it’s actually good for the profits of the enterprises that engage in this, which I think is an underappreciated benefit of not being an asshole and a really important argument that needs to be made nationally and internationally.
Goldy:
Absolutely agree, Nick, which is why I am so excited to have Zeynep Ton on the podcast. She is the Practice in the Operations of Management Professor at MIT Sloan School of Management, also the President of the nonprofit, Good Jobs Institute, and the author of a new book, which we highly recommend, The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work.
Zeynep Ton:
My name is Zeynep Ton. I am a Professor of the Practice at MIT Sloan and the President of a nonprofit, Good Jobs Institute, and I’m the author of this new book called The Case for Good Jobs.
Nick Hanauer:
So tell us precisely what qualifies a job as a good one and what’s the good jobs system?
Zeynep Ton:
I’ll mention the minimum requirements for a good job, because a good job could mean different things to different people. But in a good job, we need to feel like we are human beings, not a pair of hands. I think we all know what it means to feel like human beings. In a good job, people have to get enough pay so that they have control over their lives. Unfortunately, these minimum conditions are not met for tens of millions of people in the United States. When workers don’t make enough to make ends meet in their job, then they end up juggling multiple jobs. They can’t sleep. They’re constantly stressing about whether they can put food on the table, pay their rent, and this ends up hurting their performance too. So when you’re in the system where you’re constantly thinking about pay, everything else that the companies do to create a good job, like belonging programs, recognition programs, pizza parties, those are just a bandaid on a wound.
I think we don’t talk about pay as much. I know you do on your podcast, but in the business world, when people talk about a good job, and they’re oftentimes thinking about good job in the context of turnover, how do we reduce turnover, and I can say a good pay doesn’t guarantee a good job and low turnover, but low pay guarantees high turnover. But a lot of companies and a lot of leaders don’t get to think about pay as much because those of us who make enough underestimate the importance of pay for workers, their ability to do a good job, and for their dignity. I think too many leaders mistakenly think that they can’t afford to pay their employees more.
Goldy:
This gets to one of the reasons why I was so eager to get you on the podcast. A lot of people understand that low pay, bad working conditions, that’s bad for workers. You don’t need to explain that too much. We’ve spent a decade talking about how low pay and bad working conditions that that’s actually bad for the economy in the aggregate. But in your new book, you are addressing this at employers and you are making the argument that these low paid jobs are bad for employers, that these low wage jobs are bad for employers and that these high wage jobs, these good jobs, that’s actually good for the employer and good for their businesses. If you could explain why.
Zeynep Ton:
Exactly. First of all, I’m an operations management professor, and I started looking at retail supply chains in late ’90s. I’ve been looking at the cost of low pay for more than 20 years. In our world of supply chain management operations, it’s all about managing product availability, and it’s about algorithms, like planning and analysis, forecasting, demand optimizing, inventory levels. Early on in my research with my colleagues, I found that managing product availability was also about managing people. Oftentimes a product was at a retail store, but employees didn’t have time to shelve it or they put it in the wrong place so customers experienced a stock out. The data that was used in planning systems were inaccurate because people made mistakes. So these operational problems that happened at retail stores were so expensive, lost sales, poor merchandising decisions, high inventory costs, lower productivity.
When I looked into why do they happen all the time, I found one of the answers in high turnover on their staffing. If we come to now why low pay is so expensive, there are these huge operational execution costs, low sales, higher cost, low productivity, and then there are direct cost of turnover, which can be significant. We work with companies where they change their entire roster in a year, just the direct cost of turnover, which is recruiting, hiring, onboarding, training, time to full productivity can be from 10 to 25% of overall labor dollars spent on payroll. So there are those direct turnover costs, there are huge operational execution costs, and when companies operate with high turnover, there are so many basic management practices that they just can’t implement. They end up creating a vulnerable, uncompetitive, and inhumane system.
Nick Hanauer:
I couldn’t agree more with the argument you’re making. This exploration of the interrelationship, by the way, between low pay and low productivity is so, so important. But I just have to mention, I just had this vivid personal experience recently where I drove a long way recently from my house to go to the premier department store called Nordstrom’s in the Pacific Northwest to buy some things for the summer. I came away from that experience saying to myself, “I would’ve bought literally three times as much stuff if the store had been better organized and the staff… ” I mean, I am a man, large size, and in every single product that I tried to find, there were no larges. You would try to find somebody and they’d be like, “Well, maybe we have it in the store room.” And then they’d go get it, and it would be wrong. It was just an astonishing experience. By the way, Nordstrom’s is a company in trouble, this is not a company that’s thriving. It’s just what would it cost to make it so that rather than only one in maybe four things that I looked at I could actually buy if liked them to 80%? I mean, yeah, 100% is actually quite hard in operations management, as you know.
Zeynep Ton:
Yes. I’m so glad you brought the customer’s perspective because I realized I didn’t answer Goldie’s question about what’s a good job system, because the good job system is not just about higher pay. It’s a system that’s centered around the customer. It’s a system that helps companies win with their customers so that you can find the right product at Nordstrom’s, there are people who can help you. But what do companies need for winning? They need a great team. Any winning organization need a great team, so you have to invest in people. Invest in people through higher than market pay, good benefits, et cetera.
But then investment in people is only part of it. You also need to position that team for success. The secret source of the good job strategy or the good job system is a set of operational choices that enable high employee productivity and high contribution so that there’s a high return on the people investment so that they can serve customers better. I’ll give you one example. I have four choices around the good job strategy that create the system for operational choices, and one of those operational choices is operate with slack, which means staff your units with more hours of labor than the expected workloads. Why would you want to do that? Because anyone who has ever taken an operations class would know that targeting 100% capacity utilization in a system that has variability is a really, really bad idea.
Nick Hanauer:
It’s impossible.
Zeynep Ton:
It’s terrible idea.
Nick Hanauer:
It’s impossible.
Zeynep Ton:
So if you go to Costco for example… And by the way, Costco employees, the average worker there in 2022 made $26 an hour, which is almost $10 an hour more than average retail worker. If you go to Costco, you’re not going to see a lot of products because one of the other choices of the good job strategy is focus and simplify. But you are going to see a lot of employees, unlike you saw at Nordstrom. Why is it that they have so many employees? Because that way they make sure that the shelves are in stock, they make sure that customers go through checkout quickly, they make sure that the fresh products are really fresh, and they make sure that they have time to experiment with different displays so they have time to constantly find new ways to improve reduce costs. And because employees can contribute this much to Costco’s success, Costco can pay them more and create opportunities for success and careers, not just jobs.
Nick Hanauer:
That’s right. And it’s a virtuous cycle, right?
Zeynep Ton:
Exactly.
Nick Hanauer:
The more capable and engaged the employees are, the more successful the business is, which means the more they can pay their workers, and so on and so forth.
Zeynep Ton:
It is a virtuous cycle, but that virtuous cycle is supported by decisions that are made in the home office of organizations by people who have nothing to do with people management. For example, at a place like Costco or at a restaurant, the decisions that are made by product design people, the menu design at the restaurant or digital, “Do we have takeout? Do we not have takeout?” those types of decisions affect the productivity of workers, which then affects whether the company can provide them higher wages or not.
Nick Hanauer:
You go into detail in your book and in your articles on how much high turnover costs companies. Can you just expand on that a little bit for our listeners? I mean, the numbers are incredible.
Zeynep Ton:
The numbers are incredible, and the levels of turnover are incredible.
Nick Hanauer:
Exactly. So please, elaborate.
Zeynep Ton:
Yes. We have seen organizations have employee turnover levels ranging from 40% to 300%. A company that we are working with right now just broke the record that in Mexico their units have 400% turnover. I mean, I’ve never seen that high, which means that a typical person stays there for three months. I mean, can you imagine if you have a team made up of players who have not been there that long, how can you have expertise in that team? By the way, there are the numbers aspect, but imagine being the unit manager of that restaurant or of that store or of that call center. What are you doing? How are you spending your time? You’re constantly fighting fires because turnover goes hand in hand with attendance problems. So you’re constantly filling in for people who didn’t show up. You’re constantly solving customer problems, equipment problems. That means you have no time to hire the right people and to train them. Even if the company has great hiring or training practices on paper, there’s no time to hire the right people or train them.
And so many companies are desperate for hiring. So if you make mistakes in hiring and you can’t train a person, can you or would you want to empower them to make decisions? No.
Nick Hanauer:
Not much.
Zeynep Ton:
If you can’t empower your employees, can you offer great service to your customers? Can you win with your customers? There are the numbers that I can talk about about employee turnover, but there are also all these business practices that we see happening that hurts customers, that hurts productivity, and that creates an inhumane workplace.
Goldy:
It’s almost as if you’re telling us that there’s no such thing as unskilled labor.
Zeynep Ton:
Oh, absolutely. Of course there is no such thing as unskilled labor. I’ve looked at warehouses, I’ve looked at distribution centers, retail stores, restaurants, there are ways that corporate leaders design jobs for interchangeable parts, and that ends up being a mediocre job design.
Nick Hanauer:
Off the top of your head, can you contrast in the same industry the difference the turnover that you have in a company that is doing a good job versus a company that’s doing a terrible job?
Zeynep Ton:
Oh, yes. When I say good job versus a terrible job, I’m not saying the good jobs companies operate 5%, 10% better, they operate in a completely different paradigm. For example, in the convenience store chain industry, this is 7-Elevens of the world, for full-timers, the employee turnover in 2019 was about 107%. It might be 109%, but it’s over 100%. For QuikTrip, it was about 20%. It’s one fifth of the industry. At Costco, employee turnover is about 17%. For people who have been there for more than a year, it’s something like 7%. There are a bunch of people who have been there for 10 years, for five years. So the differences are insane between the companies that operate with low turnover versus high turnover.
Now, what happens if your turnover level is one fifth of the industry average? That means that now for every new worker you can spend five times as much on hiring, on training, on performance management without increasing your hiring, training, or performance management budget. Can you imagine the competitive advantage that these companies have when they operate with such low turnover? There are so many other things that they can do. For example, they can ensure that their customers don’t wait. They ensure that their customers get service from people who are empowered, who know exactly what they’re doing. They can ensure that their employees can constantly improve performance. These are all the things that are not available to companies that operate with high turnover.
Nick Hanauer:
It’s so obvious, yet the differences are so stark. It’s so interesting. So what do you think are the barriers to people not employing better practices? Is it stupidity or rapaciousness or-
Zeynep Ton:
Ideology?
Nick Hanauer:
What is it?
Zeynep Ton:
Bad Econ 101 textbooks?
Nick Hanauer:
Yeah.
Zeynep Ton:
All of the… Well, no, I won’t say all of the above because I don’t think it’s stupidity. But I will say the former US CEO of Walmart, Greg Foran, when he read my first book, the first book was called The Good Job Strategy, there was an interview with him, and he called Harvard Business Review, he said, “This is blindingly obvious.” No academic likes to think of her work as blindingly obvious, but I’ll take it because the pillars of the good job strategy really are blindingly obvious, the four choices. So if it is so obvious, why aren’t more leaders choosing this?
I’ll just mention three big reasons, these are not all the reasons. The first big reason is lack of imagination. Generations of leaders in this country and others have been taught that labor is just another cost, just another input to production, just another cost, and therefore, market pay is the right pay even if it’s not a living wage. They have also been taught that lean and mean is what drives efficiency when lean and mean isn’t efficient. So these leaders can’t even imagine a different system. What makes it even harder for them to imagine is siloed decision-making often using historical data.
Now, good job strategy is a system, it’s a paradigm shift, and companies that adopted it didn’t improve just a little bit, they improved a ton. I’ll give you one example. Sam’s Club is one of the companies that adopted the good Job system recently. They’ve not only reduced their turnover so much, but they’ve also improved productivity. They’ve also improved their same store sales growth. One of their leaders recently told HBR that historically they could improve their efficiency 1%, and even that was difficult. And the last few years, they improved it by 20%.
No amount of data analysis looking at historical data would have helped them imagine that they could have made that much improvement. Yet, we teach our students how to make cause and effect relationships in isolation using historical data. So that makes it even harder to imagine. So lack of imagination is the first reason. The second is that many leaders think that system change is just too risky. They’re oftentimes in their positions for just a couple of years. They have a short time horizon. They think about their reputation, they think about their jobs, and so they resort to easier and quicker fixes that have more legitimacy in the eyes of investors and the board. The truth is that the playbook for bad jobs is simpler. You pay as little as possible. You depend-
Nick Hanauer:
Yeah, it’s easy.
Zeynep Ton:
It’s easy. You depend-
Nick Hanauer:
It’s path of least resistance. Yeah.
Zeynep Ton:
And you depend as little on the front lines as possible. And the playbook for good jobs is harder. One of the executives at a workshop-
Nick Hanauer:
Yeah, you have to be good at your job, actually.
Zeynep Ton:
Ir requires competence.
Nick Hanauer:
You have to actually be good at it.
Zeynep Ton:
It requires competence, exactly. It requires competence, and there’s a million other things to mention around that. But the third reason, the third reason, and this might be the hardest to overcome, is that a lot of leaders find it hard to trust frontline workers. The good job system requires empowering frontline employees. Now, at companies that operate with low pay and high turnover… And low pay has all sorts of effects on people, I’m sure you have covered it in your podcast.
Nick Hanauer:
Yes.
Zeynep Ton:
Right? Mental, physical health, cognitive functioning, it even drops people’s IQ by 13 points. So when leaders see frontline employees having attendance problems because they didn’t have bus money because of whatever was happening in their lives, they see them not being able to focus on the job, making mistakes even for simple jobs, they see them not treating customers well, and then they ask themselves, “Are they really worthy of higher pay?” That lack of trust, this management scholar at MIT called the theory X managers, that is a huge barrier to choosing the good job strategy.
Nick Hanauer:
Also, to a certain extent, it’s riskier, especially if you’re making a transition from a bad job strategy to a good job strategy is you have to put a lot of faith in the future, right? Because if you’re doubling the pay of your employees, for example, from the minimum wage to a living wage, there is obviously some financial risk there, but obviously I’d argue it’s a good risk.
Zeynep Ton:
Well, I agree with you that you have to have faith. One of the leaders said it’s like buying a computer, you know it’s going to increase your productivity, you just can’t quantify it in advance.
Nick Hanauer:
Yes.
Zeynep Ton:
Right?
Nick Hanauer:
Mm-hmm.
Zeynep Ton:
But conviction is really important. The risk is a lot less than what we might think, and that’s why I wrote this book. The leaders who did this recently, Nick, they have made huge in investments in their employees. I mean, Mud Bay, maybe because you’re in Seattle, you might know Mud Bay, it’s a pet store. Within three years, they increase pay by 24%, and this is a company that had 2% profit margins and labor costs were 15% of their overall costs. You do the math, 24% pay improvement-
Nick Hanauer:
Yeah, it’s a lot.
Zeynep Ton:
… they’ve wiped out their profit, but they did other choices to increase productivity. And the reason that it’s not risky is, first, the status quo is riskier, and for these leaders, the connection came from, “Look, for us to grow and survive, we have to win with our customers.” For Mud Bay, e-commerce was taking away sales from them from all the other pet store retailers, so the question was, “What does it take for us to create a compelling reason for our customers to come to us so that we can grow and prosper?”
They realized it would be through offering their customers consultative selling. And then the next question was, “Could we provide that type of selling and a great environment if we operate with high turnover?” The answer was no. Then the next was, “Could we reduce our turnover if we don’t increase pay?” The answer was no. So it was a very logical conclusion. It wasn’t just Mud Bay, it was for Sam’s Club, which is a public company, it was for Quest Diagnostics call centers, which is also a public company, for many other companies.
So the conviction comes from that clear logic. And then there are ways that you can make this change so that it’s not risky. We have worked with a bunch of organizations now to help them see that you can make certain operational choices along with people investment as early as possible to get out of the vicious cycle that you are operating in, and it doesn’t break the bank. We tell companies, “Invest in pay as much as possible as early as possible. And along with that investment, look at all the things that you’re offering your customers, look at all the work that your frontline employees are doing, and ask yourselves, ‘Which of these things can be removed? Which one of these things can be reduced?’ And if you can find ways to reduce workloads, then you are already paying for higher pay investments.” And making these choices together, along with increasing expectations, is a way to minimize the risks of system change and create momentum.
Goldy:
Given the reluctance of CEOs to make this change and embrace the good job system, how useful would a high federal minimum wage be to kickstart that virtuous cycle?
Zeynep Ton:
One of our students at MIT Sloan is actually studying this exact issue, and she’s looking at what happens at different cities and states that increase minimum wage to employer policies and what happened, right? Because you might make the argument that if minimum wage increases, then for those leaders who think that people are just a cost, then they’re going to find substitutes. They’re going to look at understaffing, do more with fewer people, or use technology. That’s the very limited bad way to handle minimum wage increases. But the other way to handle minimum wage increases is to say, “Huh, my input cost, those costs are increasing, how do I design a system to increase the productivity and contribution of my workers?” So it could encourage more leaders to choose the good job strategy because it will be necessary for them to be able to stay in business and serve their customers to design a system that creates high productivity and high employee contribution.
Nick Hanauer:
Can we go back to the Costco versus Sam’s Club example because I believe Costco now has approximately three times the revenue of Sam’s Club, but it also pays its workers significantly more? Correct?
Zeynep Ton:
So until 2019, that was correct. Sam’s Club is one of the companies that I talk about in the book. In 2019, they started their pay increases, and the pay increases came along with other things that I talk about in the Good Job Strategy. They simplify, they use technology, they cross-train their employees, et cetera. But they made pay raises five to $7 an hour from a basis of $15 an hour for tens of thousands of people early on. Those were life-changing pay raises for employees. Along with pay raises, they created stable schedules, which they called block schedules. So give employees predictable, stable, consistent shifts. Once they started getting the benefit of those pay raises, they created momentum. Then they began raising the pay of everyone else.
From 2018, I think, to 2020, within a two-year period, they made further almost 18% more pay raises to their employees. So there used to be a huge gap between Costco and Sam’s Club, and that gap is not really there anymore.
Nick Hanauer:
Interesting.
Zeynep Ton:
And by the way, there used to be a huge gap between their performance. So Sam’s Club in 2017, they were losing their members, their same store sales growth was not increasing, their productivity was low, their turnover was so high. Since then, they cut their turnover 25%. Since-
Nick Hanauer:
Oh, that’s amazing.
Zeynep Ton:
… they had so many quarters of positive and double-digit same store sales growth. Doug McMillan, I think this was two years ago during one of the investor meetings, he said, “I’ve never seen this much momentum at Sam’s Club.” So Sam’s Club I think shows us that you can be a huge company and a public company and still do this.
Goldy:
Yeah. I remember when McMillan first announced that he was raising starting wages at Walmart, and the stock took a huge hit. I guess he’s laughing at them now, huh?
Zeynep Ton:
Yes. I’ll say, one of the things that fascinated me about Sam’s Club, I remember meeting their CEO, John Furner. We were having dinner, and two minutes into our conversation, he saw my admiration for Costco and Jim Sinegal. Jim comes to my classes every year, and Costco has run a really fantastic business. So he saw my admiration for Costco, and his first comment to me was, “Look, Costco and Sam’s Club both started in 1983. Costco has had two CEOs since they began. I’m Sam’s Club’s 14th CEO. Now you do the math-
Nick Hanauer:
Yeah, exactly.
Zeynep Ton:
… you realize, this person is going to be in that position for just a few years. He’s under tremendous performance pressure. But what did he do? He decided to win with the customers, with the members. The way to do that, once you choose to be customer-centric, the good job strategy then just follows.
Goldy:
Ah, so high turnover is bad for CEOs too.
Nick Hanauer:
Absolutely.
Zeynep Ton:
Yes.
Goldy:
They need that on-the-job training.
Nick Hanauer:
By the way, Costco was founded by both Jim and Jeff Rottman-
Zeynep Ton:
Jeff… Yes, and he passed away.
Nick Hanauer:
… who are dear friends. It’s a Seattle-based company.
Zeynep Ton:
Do you know Jim?
Nick Hanauer:
Of course. They’re both extraordinary people.
Zeynep Ton:
I have a whole chapter, Nick, almost about Jim, all the things I’ve learned from him.
Nick Hanauer:
Both as business people, but also as citizens and civic actors in our city, both extraordinary people. Their business operations philosophy very much mirrored their civic and personal personalities.
Zeynep Ton:
Yes.
Nick Hanauer:
Jeff was and Jim is, they were just extraordinarily generous, thoughtful, good people. And they ran their business that way, and it paid huge dividends.
Zeynep Ton:
Exactly.
Nick Hanauer:
There was a lesson there for other CEOs.
Zeynep Ton:
Exactly. When Jim comes to my class, I think the students, they think about this is too good to be true, but then they meet him. He walks through his logic and why he makes certain decisions, and the students realize that integrity is a habit for him and for Costco.
Nick Hanauer:
And a competitive advantage.
Zeynep Ton:
And an advantage, yeah. Costco is not alone, there are other companies. We oftentimes complain about CEOs and companies, but there are others. H-E-B is another great example where integrity is a habit.
Nick Hanauer:
Again, we could drone on and on and on about this, but I’ve always believed that operating… because it’s not just frontline employees that get dramatically more productive when you treat them well and pay them well, the entire team works much better in a business enterprise if you operate with rigorous integrity.
Zeynep Ton:
Exactly.
Nick Hanauer:
Management teams work insanely more effectively if you operate with integrity, because trust is a lubricant in businesses. Trust is what enables people to make good decisions every day to further the enterprise rather than spending 70% of their time covering their asses and sub-optimizing processes to make themselves look good.
Zeynep Ton:
Exactly.
Nick Hanauer:
It goes all the way through the organization, but often the frontline workers are the ones that are excluded from this.
Zeynep Ton:
Exactly. Exactly. We all understand that trust is important at a high level, at the corporate headquarters, but building a business based on this trust… When companies treat their workers as interchangeable parts because they operate with high turnover, it’s impossible to create trust. Headquarters don’t trust frontlines, and the frontlines don’t trust the headquarters, because when all the decisions are made centrally, some of those decisions are not good, they don’t work in the frontlines. Some of them are even comically bad, and then they don’t trust the competence and goodwill of headquarters, and there’s a constant distrust loop. Jim told my students, he said, “70 cents of every dollar we spend to run our company goes to people.” That tells you how important people management is. This is a people business, and if you don’t do that well, you are going to screw up your company pretty badly. By this time, my students had seen how many ways companies screw up their business when they go cheap on their most important value driver, which is their people.
Goldy:
So is there anything we’ve missed here that you think we should discuss?
Zeynep Ton:
Oh, I don’t know, I can talk to you for hours. Sorry, I go on and on, but-
Nick Hanauer:
No, no, no, it’s perfect.
Goldy:
No, no, that’s our problem too. But we don’t want to take up your whole day, and unfortunately we can’t do a two-hour podcast…
Goldy:
Really?
Nick Hanauer:
… because we care about our customers.
Zeynep Ton:
Yes. To be customer centered, you have to get to the point.
Goldy:
So final question, Nick?
Nick Hanauer:
Well, we have two final questions, which is… Goldie, why do I always forget the word?
Goldy:
The benevolent dictator-
Nick Hanauer:
The benevolent dictator.
Goldy:
That’s what you are, Nick.
Nick Hanauer:
I know one, I’m the benevolent dictator. We have a benevolent dictator question, which is, if you could do anything, if you could rearrange things any way you wanted, what would you do? What policies would you implement? What things would you encourage to make the world a better place?
Zeynep Ton:
This is so against how I think in terms of systems, because if there was one thing, it will be so obvious, but we need to create better systems. If it was one thing, maybe I would work to change people’s mindsets about people and what it means to run a successful organization.
Nick Hanauer:
Great. And the final question is, why do you do this work?
Zeynep Ton:
Well, as we’ve been talking about, leaders have a choice in how they run their business, and I’ve seen how much that choice can impact the lives of workers and everyday interactions between workers and customers. The good job strategy is not a feelgood choice, it’s a profit maximizing choice. So I do what I do so that more leaders make that choice, and so that more leaders think differently about what it means to run a good business. Every year I get to teach 170 MBA students and many more executives at MIT Sloan, and that’s a real privilege. At Good Jobs Institute, I work with my former MBA students, and it’s a privilege to be able to help companies adopt a good jobs system. So that’s, I guess, on an intellectual level. And on that more personal level, I feel an obligation to do something that’s useful with the abilities and knowledge and platform that I have for this country. I came to the United States with a volleyball scholarship, and this country gave me a free education and gave me citizenship, and I do this work because this is my way of serving.
Nick Hanauer:
That’s fabulous. Well, thank you so much for spending the time with us.
Zeynep Ton:
Thank you for having me.
Goldy:
There is this myth that has long existed about Henry Ford and the $5 day, which is that he decided to more than double the wages of his employees because, as he said after the fact, he wanted Ford workers to be able to afford buy Ford cars. That demand side argument has largely been spun up as his reasoning for dramatically increasing the wages of his workers. But the truth is, that’s not what he told his board at the time. His board, by the way, that really objected to the idea, what he told them at the time was, “Hey, guys, we have 300% turnover at this giant factory we just built. We cannot possibly run it at capacity when we are hiring people turning over multiple times a year. And so if we out-pay the other car manufacturers, we will get the best workers, and we will have the least turnover.” And within a year, they reduced their 300% turnover to something around 30, 35% turnover, and the rest of the industry was in fact forced to follow.
That is the real story of the $5 day. After the fact, he made that other argument because it sounded really good. But the fact was, those Ford factories were a hell hole of undertrained workers with high absenteeism and horrific accident rates. People were losing fingers and hands and arms all the time in the machinery there because they didn’t know how to operate it.
Nick Hanauer:
I did not know that. That’s amazing.
Goldy:
So it turns out that, of course, we’ve known for 100 years that paying your workers better reduces turnover, increases productivity, increases utilization of your capital investment, increases profits. And yet, there has been this ideology that said, “No, no, no, no, workers are cogs, you want to pay them as little as possible because it’s just another input, but you want to lower your costs.” Which is why it was so exciting for me when I first read that article in Time and then I saw Zeynep’s book saying, “No, actually, you know what, this is good for employers too, the high pay.”
Nick Hanauer:
Yeah. And Goldie, it strikes me that Zeynep’s central point is very middle out, right?
Goldy:
Mm-hmm.
Nick Hanauer:
I mean, she is making this very full throated argument for treating people better, both paying them more and treating them better, and making a very full throated argument that by doing so the people doing that will benefit too. This is the central-
Goldy:
It turns out, Nick, President Biden keeps saying that the economy grows from the middle out. Well, you know what? So do individual businesses.
Nick Hanauer:
That’s right. Absolutely. It’s the same principle just on a smaller scale.
Goldy:
It’s just really exciting to see somebody like Zeynep with the status and prestige that MIT gives her making this case to CEOs that, “No, this is actually the better way to run your business. This is the way to out-compete the competition.”
Nick Hanauer:
Absolutely. Such an interesting conversation and such a great project, and y’all should buy the book and give it to your bosses.
Goldy:
You will find, as always, we have links in the show notes. You can find her book, The Case For Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work, at your local independent bookstore or online at the big book monopolist that’s so easy to buy from.
Speaker 4:
Pitchfork Economics is produced by Civic Ventures. If you liked the show, make sure to subscribe, rate, and review us wherever you get your podcasts. Find us on Twitter and Facebook at Civic Action and Nick Hanauer, follow our writing on Medium at Civic Skunk Works and peek behind the podcast scenes on Instagram, @pitchforkeconomics. As always, from our team at Civic Ventures, thanks for listening. See you next week.