A Minimum-Wage Hike Could Help Employers, Too

This post originally appeared on Harvard Business Review blog network.

President Obama’s State of the Union address tonight is expected to include a push to increase the minimum wage. A lot of companies that rely on low-wage workers are worried about that. It’s obvious to them that paying employees more will result in some combination of three outcomes: (a) profits will suffer as the wage increases eat into margins, (b) prices will have to be raised to maintain profitability, and (c) operational quality will suffer as a result of cutting headcount.

But there is more to the equation than wages, prices, and quality. There’s what those wage-earners can do to earn their wages—their productivity, motivation, customer service, and contributions to continuous improvement. The smart way to deal with an increase in the minimum wage is to design work in a way that improves employees’ productivity and increases their contribution to profits. All this is possible even in low-wage settings. In fact, some companies are already doing it.

Early in my career, I did research in retail operations that showed that bad jobs with poverty-level wages, unpredictable schedules, and few opportunities for advancement were not just rotten for the employees but were hurting the companies and their customers. Retail stores were full of problems that good, motivated employees could fix, such as misplaced products that no one could find and obsolete products lingering on the shelves, which led to lost sales and profits and frustrated a lot of customers.

Later on, I began to study some retailers that thrived by managing to offer good jobs and low prices. And I mean thrived—these companies were growing and coming out on top in very competitive industries, while spending much more than their competitors did on paying and training their employees. I examined four companies in particular: Mercadona, Spain’s largest supermarket chain; QuikTrip, a large convenience store chain with gas stations; and the well-known retailers Trader Joe’s and Costco.

These four companies don’t seem to have much in common. Different products, different customers, different ownership structures, different locations, different store sizes, and different employee incentives. Whatever they are doing right, it doesn’t depend on any of those factors. But here’s what is common among them. They all follow what I call the good jobs strategy, which is a combination of smart operational choices and investment in people.

When I examined these companies, I saw that they made four choices in how they designed their work. They: (1) offer less, (2) combine standardization with empowerment, (3) cross-train, and (4) operate with slack. These choices transform their heavy investment in employees into great performance by reducing costs, improving employee productivity, and leveraging a fully capable and committed workforce. I won’t go through all four choices here—that’s enough for a book. (Hint, hint.) Let’s just go through “operate with slack” to get a feel for what the choices are like and how they support the good jobs strategy.

Workload in a service setting is always uncertain. You never know how many customers will show up when and what they will want. So it’s easy to have either too many or too few people on the job. In my earlier research, I saw retailers consistently erring on the side of too few. This was no accident; they were more worried about keeping labor cost low than about the consequences of having too few employees. Companies that follow the good jobs strategy, on the other hand, consistently err on the side of too many—they operate with slack. That obviously improves customer service and sales, but it also helps companies reduce costs—yes, reduce—by keeping mistakes to a minimum and by giving employees time to contribute to continuous improvement.

But here’s the key. Operating with slack works great for these companies because it amplifies the benefits of their other three operational choices and their heavy investment in people. For example, because these retailers offer less to their customers and standardize many processes, they have a better sense of what the workload will be at their stores. So while they deliberately err on the high side, they don’t tend to be way off. And since they cross-train, their employees can always be doing something useful (not just make-work) even when there are no customers.

Sometimes people think I’m claiming that if a company pays higher wages, it will make more money. That’s not my message at all. The good jobs strategy is much more complicated than that. Yes, it includes paying employees more, but it also includes those operational choices, which are very down-to-earth yet quite unusual in many industries.

The good jobs strategy is not easy. You have to get many things right all at the same time. You have to embark on this path with a long-term perspective—you can’t just plug the components in and start raking in profits. But it is a strategy for producing excellence. That has been proven by the companies I studied, among others. It’s a sustainable strategy where everyone—customers, employees, investors—wins.

This is why US employers shouldn’t fear the prospect of a minimum wage hike, and in fact should view it as something of a gift. If firms are forced by law to pay their employees higher wages, they will rethink their operations in ways that make sense for all kinds of reasons. A good jobs strategy will let them reward their employees without hurting their customers or their bottom line.