Sometimes It is About the Money

Often employee engagement and job satisfaction involve more than money. For example, involvement in solving problems. But those working for wages that cannot make ends meet, whose jobs are precarious, and that have few prospects of advancement know that the money is important and in a hierarchy of needs takes precedence over other good but less basic necessities.

This post combines two recent stories. The stories are not directly related to each other but I think they are two sides of the same coin. On the one side is the question of whether it is good for business to pay employees good wages and on the other side, one of the current employee engagement fads, namely, “happiness.”

First the happiness fad.

The September 20th Economist wrote:

This columnist feels the same suspicion of the fashion for happy-clappy progressive management theory that is rushing through the world’s companies and even some governments.

The leading miscreant is Zappos, an online shoe shop. The firm expects its staff to be in a state of barely controlled delirium when they sell shoes. Pret A Manger, a British food chain, specialises in bubbly good humour as well as sandwiches. Air stewards are trained to sound mellifluous but those at Virgin Atlantic seem on the verge of breaking out into a song-and-dance routine. Google until recently had an in-house “jolly good fellow” to spread mindfulness and empathy.

A weird assortment of gurus and consultancies is pushing the cult of happiness. Shawn Achor, who has taught at Harvard University, now makes a living teaching big companies around the world how to turn contentment into a source of competitive advantage. One of his rules is to create “happiness hygiene”. Just as we brush our teeth every day, goes his theory, we should think positive thoughts and write positive e-mails.

Zappos is so happy with its work on joy that it has spun off a consultancy called Delivering Happiness. It has a chief happiness officer (CHO), a global happiness navigator, a happiness hustler, a happiness alchemist and, for philosophically minded customers, a happiness owl. Plasticity Labs, a technology firm which grew out of an earlier startup called the Smile Epidemic, says it is committed to supporting a billion people on their path to happiness in both their personal and professional lives.

One of the sharpest books published on the phenomenon is “The Managed Heart” from 1983, in which Arlie Hochschild, a sociologist at the University of California, Berkeley, noted that many employers demanded “emotional labour” from workers in the form of smiles and other expressions of “positive emotion”. Firms are keen to extract still more happiness from their employees as the service sector plays an ever greater role in the economy.

Some firms are trying to create some wellbeing, too, showering their employees with mindfulness courses, yoga lessons and anything else that proves that managers are interested in “the whole person”. Only happy fools would take that at face value. Management theorists note that a big threat to corporate performance is widespread disengagement among workers.

Companies would be much better off forgetting wishy-washy goals like encouraging contentment. They should concentrate on eliminating specific annoyances, such as time-wasting meetings and pointless memos. Instead, they are likely to develop ever more sophisticated ways of measuring the emotional state of their employees. Academics are already busy creating smartphone apps that help people keep track of their moods, such as Track Your Happiness and Moodscope. It may not be long before human-resource departments start measuring workplace euphoria via apps, cameras and voice recorders.

The idea of companies employing jolly good fellows and “happiness alchemists” may be cringe-making, but is there anything else really wrong with it? Various academic studies suggest that “emotional labour” can bring significant costs. The more employees are obliged to fix their faces with a rictus smile or express joy at a customer’s choice of shoes, the more likely they are to suffer problems of burnout. And the contradiction between companies demanding more displays of contentment from workers, even as they put them on miserably short-term contracts and turn them into self-employed “partners”, is becoming more stark.

As usual, I suspect the only ones who will be happy with the happiness craze are the consultants and gurus who charge fees for dispensing advice on said topic.

Instead of spending money on happiness experts or on corporate Organizational Development efforts to engender happiness, perhaps that money is better invested in employee wages and training. This takes us to story #2, about Walmart’s foray into rising its wages and career advancement prospects.

The New York Times’ Neil Irwin, in a story titled “How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More,” wrote about how

A couple of years ago, Walmart, which once built its entire branding around a big yellow smiley face, was creating more than its share of frowns.

Shoppers were fed up. They complained of dirty bathrooms, empty shelves, endless checkout lines and impossible-to-find employees. Only 16 percent of stores were meeting the company’s customer service goals.

The dissatisfaction showed up where it counts. Sales at stores open at least a year fell for five straight quarters; the company’s revenue fell for the first time in Walmart’s 45-year run as a public company in 2015 (currency fluctuations were a big factor, too).

To fix it, executives came up with what, for Walmart, counted as a revolutionary idea. This is, after all, a company famous for squeezing pennies so successfully that labor groups accuse it of depressing wages across the American economy. As an efficient, multinational selling machine, the company had a reputation for treating employee pay as a cost to be minimized.

But in early 2015, Walmart announced it would actually pay its workers more.

That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?

It is an idea that flies in the face of the prevailing ethos on Wall Street and in many executive suites the last few decades. But there is sound economic theory behind the idea. “Efficiency wages” is the term that economists — who excel at giving complex names to obvious ideas — use for the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.

Walmart’s experiment holds some surprising lessons for the American economy as a whole. Productivity gains have been slow for years; could fatter paychecks reverse that? Demand for goods and services has remained stubbornly low ever since the 2008 economic crisis. If companies paid people more, would it bring out more shoppers — benefiting workers and shareholders alike?

Deep in a warren of windowless offices here, executives in early 2015 sketched out a plan to spend more money on increased wages and training, and offer more predictable scheduling. They refer to this plan as “the investments.”

The results are promising. By early 2016, the proportion of stores hitting their targeted customer-service ratings had rebounded to 75 percent. Sales are rising again.

The company offers its millions of shoppers a simple way to make their dissatisfaction known. On the back of sales receipts is a message, “Tell us about your visit today,” along with instructions to log on to a website and answer questions about the store: Was it clean? Were they able to get what they came for quickly? Were employees friendly?

In early 2015, the answers that poured into Walmart’s global headquarters were, in a word, awful.

From store managers nationwide, they heard that years of cost-cutting meant Walmart had become viewed as a last-ditch option for employment — not the place that ambitious people might want to work. They were under such pressure to keep labor costs low that the employees they hired showed little loyalty or career-building devotion to their jobs.

“We realized quickly that wages are only one part of it, that what also matters are the schedules we give people, the hours that they work, the training we give them, the opportunities you provide them,” said Judith McKenna, who became chief operating officer in late 2014, in a recent interview. “What you’ve got to do is not just fix one part, but get all of these things moving together.”

That is how Walmart decided to build 200 training centers to offer a clearer path for hourly employees who want to get on the higher-paying management track. And it said it would raise its hourly pay to a minimum of $10 for workers who complete a training course and raise department manager pay to $15 an hour, from $12. It said it would offer more flexible and predictable schedules to hourly workers.

The news from Bentonville made headlines worldwide. The federal minimum wage had been $7.25 since 2009, and the labor market had awarded meager pay gains for people at the lower end of the spectrum for decade, facts that helped increase Walmart’s bottom line. Now, the United States’ largest private employer — Walmart has about 2.3 million workers around the world — was signaling it was about to gingerly try a different approach, putting $2.7 billion where its mouth was.

Walmart says its average pay for a full-time nonmanagerial employee is now $13.69 an hour, up 16 percent since early 2014. In the same span, consumer prices have risen 2.1 percent.

Walmart’s pay increases got most of the attention. But the new training and prospect of better career paths for hourly staff members could be more significant in the long term.

It’s not that the retail industry doesn’t offer potential paths to good incomes. Starting pay for an assistant store manager at Walmart is $48,500, and the manager of one of its large stores can make comfortably above $100,000.

The problem — described by Walmart managers and people outside the company who study labor markets — is that there is no clear path for an entry-level worker to get there. Much training is impromptu, and chains have tended to view their hourly workers as interchangeable cogs rather than resources worth investing in.

That reputation has been particularly strong at Walmart.

“I didn’t used to think this would be something I would want to do, to work at Walmart,” said Garrett Watts, a 22-year-old newly promoted customer service manager at a store in Fayetteville. “There’s a stigma with it. It used to be, if you worked at a Walmart, it was the equivalent of a fast-food restaurant.”

Economists (including Janet L. Yellen, the Federal Reserve chairwoman, who worked on these topics as an academic economist in the 1980s) have found evidence that people are more productive when they are paid above the market rate.

An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up, compared with people who feel they are in a dead-end job. A person has more incentive to work hard, even when the boss isn’t watching, when the job pays better than what you could make down the street.

Economists have found evidence of this in practice in many real-world settings. Higher pay at New Jersey police departments, for example, led to better rates of clearing cases. At the San Francisco airport, higher pay led to shorter lines for passengers. Among British home care providers, higher pay meant less oversight was needed.

What is interesting about this is that, if you look at what’s ailing the broader United States economy, it looks a lot like what you would expect if employers were, en masse, failing to understand the possibility of efficiency wages.

Employers have succeeded at holding down labor costs. The “labor share” of national income — the portion of the national economic pie that goes to workers’ pay, as opposed to corporate profits and elsewhere — has fallen. And average pay for nonmanagerial workers has grown more slowly than the overall economy.

This has coincided with disappointing results for the economy. Worker productivity has been rising slowly for the last decade, and prime working-age Americans are staying out of the work force in droves. This implies that plenty of people don’t see jobs out there that offer sufficient pay or opportunity to make the jobs worth doing.

Individually, employers may think they are making rational decisions to pay people as little as possible. But that may be collectively shortsighted, if the unintended result is less demand for the goods and services they are all trying to sell to these same people.

Just maybe, in other words, employers across the country are pushing down labor costs like Walmart, circa 2014 — and this is one of the major culprits behind disappointing economic results since the start of the 21st century.

“The management philosophy that became popular in the 1980s that led companies to cut pay for low-wage workers, fight unions and contract out work may have been profitable for the companies that practiced it in the short run,” said Alan Krueger, a Princeton economist and leading scholar of labor markets. “But in the long run it has raised inequality, reduced aggregate consumption and hurt overall business profitability.”

One of the questions facing society is whether and how one can have vibrant companies if fewer and fewer people have incomes to buy the stuff their making and the services offered. In a past post this blog has mused about the consequences of capital rendering labor less needed.

Rather than spend money on “happiness” gurus or “employee engagement” experts perhaps we ought to spend some time and money thinking about how companies will handle a low-employment and precarious employment consumer society.