Pay to Prosper: Companies That Invest In Higher Salaries for Low-Level Employees and Beat Tthe Competition

Salaries in the US and Europe have been stagnant for a generation. Those who argue against minimum wage increases and further cuts in benefits cite competition and the need for profitability to spur innovation as well as reinvestment as the primary reasons for keeping wages low.

What they fail to acknowledge is that the opposite may actually be true: companies that pay well for entry and lower level workers in order to realize productivity gains, enhanced customer satisfaction that leads to increased sales at higher price points and the higher margins associated with lower employee turnover.

The following article explains how a number of large national US chains: Costco, Trader Joe's and QuikTrip pay higher wages and, contrary to perceived wisdom, are outperforming their competition.

The reasons for their success are both tangible: the desire to perform in order win promotion and even greater financial rewards, as well as intangible: pride, satisfaction, commitment and a determination never to experience or return to unemployment and poverty.

In short the additional cost of better pay is more than offset by the growth in sales and profitability it can foster with good management and smart processes. The tradeoffs come in more limited product selection, and short term executive compensation may be curtailed to build for the long run. In a world where receptionists have college degrees, production workers need to demonstrate facility with statistics and warehousemen must be adept at technological processes, most workers are now 'talent' and must be paid accordingly if their efforts are to be optimized. JL

Sophie Quin reports in the National Journal:

Companies who invest in higher salaries for low-level employees find success in a competitive market.

The average American cashier makes $20,230 a year, which in a single-earner household would leave a family of four living under the poverty line. But if he works the cash registers at QuikTrip, it’s an entirely different story. The convenience store and gas station chain offers entry-level employees an annual salary of around $40,000, plus benefits. Those high wages didn’t stop QuikTrip from prospering in a hostile economic climate. While other low-cost retailers spent the recession laying off staff and shuttering stores, QuikTrip expanded to its current 645 locations across 11 states.

Many employers believe that one of the best ways to raise their profit margin is to cut labor costs. But companies like QuikTrip, the grocery store chain Trader Joe’s, and Costco Wholesale are proving that the decision to offer low wages is a choice, not an economic necessity. All three are low-cost retailers, a sector that is traditionally known for relying on part-time, low-paid employees. Yet these companies have all found that the act of valuing workers can pay off in the form of increased sales and productivity.
“Retailers start with this philosophy of seeing employees as a cost to be minimized,” says Zeynep Ton of MIT’s Sloan School of Management. That can lead companies into a vicious cycle. Underinvestment in workers can result in operational problems in stores, which decrease sales. And low sales often lead companies to slash labor costs even further. Middle-income jobs have declined recently as a share of total employment, as many employers have turned full-time jobs into part-time positions with no benefits and unpredictable schedules. 
QuikTrip, Trader Joe’s, and Costco operate on a different model, says Ton. “They start with the mentality of seeing employees as assets to be maximized,” she says. As a result, their stores boast better operational efficiency and customer service, and those result in better sales. QuikTrip sales per labor hour are two-thirds higher than the average convenience store chain, Ton found, and sales per square foot are over fifty percent higher. 
Entry-level hires at QuikTrip are trained for two full weeks before they start work, and they learn everything from how to order merchandise to how to clean the bathroom. Most store managers are promoted from within, giving employees a reason to work hard. "They can see that if you work hard, if you're smart, the opportunity to grow within the company is very, very good," says company spokesman Mike Thornbrugh.
The approach seems like common sense. Keeping shelves stocked and helping customers find merchandise are key to maximizing sales, and it takes human judgment and people skills to execute those tasks effectively. To see what happens when workers are devalued, look no further than Borders or Circuit City. Both big-box retailers saw sales plummet after staff cutbacks, and both ultimately went bankrupt.
As global competition increases and cheap, convenient commerce finds a natural home online, the most successful companies may be those that focus on delivering a better customer experience. Ton's research on QuikTrip and other low-cost retailers--now a Harvard Business School case--is applicable across a variety of industries, she says. Toyota's production system, for example, gives all employees--including workers on the assembly lines--a voice in improving products.
But for a publicly-traded company under pressure to show quarterly earnings, it's tempting to show quick profits by cutting labor costs. The bad economy has also made workers willing to take a lower-paid position rather than join the ranks of the unemployed. New employer-sponsored health insurance requirements under the Affordable Care Act are only going to give employers an additional incentive to shift workers to a part-time schedule. 
There are also trade-offs to investing in employees. Businesses that spend more on their workers have to cut costs elsewhere. Trader Joe's streamlines operations by offering a limited number of products and very few sale promotions. Costco stocks products on pallets, as a warehouse would. And the QuikTrip model requires the fortitude to accept possible short-term drops in profits. "You have to take a loss for a little bit," says Maureen Conway, executive director of the Economic Opportunities Program at the Aspen Institute. "You have to pay above market. You have to change how you do business."
At the upper echelons of the American workforce, salaries have soared. Companies are accustomed to thinking of their highest-level employees as “talent,” and fighting to hire and reward people who will help grow the company. Now Trader Joe's and QuikTrip are proving that lower-level employees can be assets whose skills improve the bottom-line as well.