In the midst of several years of environmental, social, and economic upheavals, including the lasting effects of Covid on the workforce, consumers and workers have been pulling companies toward conscious capitalism. And while companies have been pulled, that isn’t the denouement of this story. 

Recently at a property summit in Australia, Tim Gurner expounded upon the need for there to be pain in the economy and for companies to flip the script on workers. Namely, workers should be afraid and feel lucky for their jobs, not the other way around. 

This seems to be the opposite direction of where companies should be going according to Zeynep Ton, a professor at MIT’s Sloan School of Management and author of The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work. 

“A good job could mean different things to different people. Right sense of belonging, achievements, purpose, recognition are all the ingredients,” Ton said, but there are “minimum conditions that all companies should have.” 

“Those minimum conditions are first, very obviously, being treated like a human with brains with a heart, not just a pair of hands. And then the second one is for pay to be high enough so that people can take control over their lives.” 

Ton was interviewed by Editor in Chief of the Harvard Business Review, Adi Ignatius. They spoke at a recent From Day One fireside chat in Boston. 

Market Rate Pay vs. the Good Jobs Strategy 

Taking a step back, Ignatius pointed out that Ton actually wrote two books about jobs, her current one The Case for Good Jobs and her previous The Good Jobs Strategy. In The Good Jobs Strategy, Ton used the low cost retail market as an example of how companies make a choice on two different ways to operate. Companies can choose to offer low wages, have low productivity, and high turnover rates. This is a “bad job strategy” according to Ton.

“The other world is to pay employees a lot more than competitors do, offer them better benefits, and design the job for high productivity, high contribution, and operate with low employee turnover, great customer service, and more,” Ton said. 

Ignatius brought up the fact that a lot of CEOs “care about the planet” per se, but don’t pay mind to labor issues. 

“It’s always amazing to me that some leaders talk about conscious capitalism, but when it comes to their frontline workers,” Ton said, are “completely fine with below subsistence wages” and all the problems that arise from it. She points to generations of business leaders being taught that “market pay is the right pay” and says the market pay mentality is driven by the idea that “labor is just another cost of production that is just like any other input.”  

“And when we think about inputs to production, the right pay is the market pay. So because people are just another cost, we should pay market wages. And paying market wages is so dominant, that people can’t even imagine operating any differently.”

Using Costco as an example, Ton says co-founder Jim Sinegal comes to her classes every year to address students and his message is: Of course, you pay people more. “Because you understand that when people can’t focus on the job, turnover is going to be high. And now there’s so much research that shows that low pay is associated with all sorts of health costs. It even lowers cognitive functioning, low pay is equivalent to a 13 point reduction in IQ.”

Ton says the resistance to higher pay is short-sighted. Low pay and high turnover leads directly to high turnover costs. 

“We have worked with organizations, frontline organizations, and we’ve seen turnover levels, anywhere from 40% to 400%. So the direct costs are recruiting, hiring, onboarding, time to productivity training. Those costs can be 10 to 25% of the total labor payroll spent annually.” Turnover costs pale in comparison to other financial costs, like lost sales, mistakes, lower productivity, lower quality. 

Why isn’t higher pay being adopted?

Ton gave three reasons why she believes leadership is resistant to making the better pay change.

“There’s a lack of imagination that there could be another world. And one of the things that makes imagination very difficult is a lot of organizations make their decisions, looking at just numbers. And oftentimes, they work in silos, and they look at the history and what happened in the past. And that prevents them from imagining any other possibility going forward,” Ton said.

Secondly, leadership has a long laundry list of priorities, with board members and stakeholders being top priority and high turnover and the cost of high turnover being much lower. “The investors and board [are] not asking you about what’s your turnover? What’s your cost of turnover? How good is your customer satisfaction?” Given all that leadership has to deal with, accepting high turnover, and its costs, are simply easier.

“The playbook for a good job strategy is harder than the playbook of pay as low as possible. In the good job system, you pay high. You design the work, which means you cross train your employees. You empower them to make decisions. You make their work better. You pay attention to staffing levels, so they can come up with improvement ideas.”

The third reason these changes aren’t more commonplace is both a lack of conversation on the topic and a misplaced lack of trust between management and staff. 

“When they are stuck in their own vicious cycle of poverty, because pay is so low, they have all sorts of problems, cognitive problems, health problems. They’re not performing well on the job.” Ton says management incorrectly equates this to a lack of capability on the part of the worker. 
“Well, I can’t trust you, because you show up late. I can’t trust you, because you just yelled at the customer. So how am I going to empower you to make decisions? How am I going to invest in you?” Ton said.

AI as an Answer

Before stepping off the stage, Ignatius asked Ton what she thought about AI’s impact on labor. 

“I think it really depends on how we use technology, right? Technology doesn’t have an effect. Technology’s effect on work and workers will depend on how we use our imagination to deploy technology,” Ton said. 

Turning to the example of Sam’s Club, Ton described how they were able to use technology to better utilize staff, raise salaries, and improve the customer experience. She gives the example of purchasing a tire for your car several years ago versus now, a process that used to take 20 minutes or more. “Now with technology that processes just a few minutes. That means that the associate, instead of wasting their time looking through different manuals, can focus on the customer. They can ask you for ID. What are you using your car for? What performance are you most interested in? Do you want a low cost?” They are now better advocates for their customers. “And because their job is a lot more productive. Sam’s Club can pay them more.”

So what should business leaders talk about the next time they find themselves at Davos, for example?

“Instead of talking about other things, people at Davos should be talking about pay. And make sure that everybody makes a living wage,” Ton said.

Matthew Koheler is a freelance journalist and licensed real estate agent based in Washington, DC. His work has appeared in Greater Greater Washington, The Washington Post, The Southwester, and Walking Cinema, among others.