Mike Lehr's Blog

In the March 26, 2012 edition of The New Yorker, I ran across the article, “The More the Merrier”, which sited the work of Zeynep Ton, a professor at the MIT Sloan School of Management, that looked at four low-price retailers: Costco, Trader Joe’s, Quik Trip and Mercadona. The article cited these findings:

These companies have much higher labor costs than their competitors. They pay their employees more; they have more full-time workers and more salespeople on the floor; and they invest more in training them. . . . What’s more surprising is that they are more profitable than most of their competitors and have more sales per employee and per square foot.

In my previous post, “Business Profitability Paradox”, I expressed that a business that maximizes its profits every minute will eventually go out of business because no investments are made (which hurt profitability). The article cites the demise of retailers such as Circuit City and Home Depot when they cut labor costs (to maximize profits short term) only to see the first go out of business and the second to be a shadow of its former self.

Thus, when employers start demanding a good ROI (return on investment), I often ask, “Over what time period?” In this case, training and a good business culture don’t happen overnight; however, the costs do. Many times, as with Circuit City and Home Depot, profits rise immediately with the right cost cuts. However, the revenues it hurts don’t fall off until later.

Now, it’s easy to discount Ton’s study as solely a retail phenomenon, but the investment principles hold true beyond just labor.

Therefore, over what period do you want a good ROI? That answer will determine the type of investments you are willing to make.
 
Original post: Business Profitability Paradox

Related post by Zeynep Ton: Retailers Should Invest More in Employees

A labor relations expert emailed me describing a trial in which an employee lied about a previous injury even when the truth would have helped her receive compensation. He wondered whether such lying was just something the employer had to accept.

First, I would broaden the context by asking: Why did the employee feel the need to push this to trial? She obviously had no confidence in her employer looking out for her. Yes, some employees game the system; some professionals even try to help. However, the fact remains that employers who have mediocre relationships with employees are going to experience more contention and dishonesty than those who have exemplary relationships.

In these situations, employees will lie even if the truth helps because 1) they don’t know that, or 2) even if they do know it, they don’t believe it. Once an employee refused to take documents to her doctor certifying a serious health condition because she didn’t believe her employer was trying to help.

Second, many employees just don’t believe the judicial process is there to help. To impress this on employers, I often ask whether they would tell someone like Stalin or Hitler the truth even if they assured them of fair treatment? Yes, an extreme view, but not so far from the true feelings of some employees.

Finally, we falsely assume that if people aren’t telling the truth then they are lying. In reality, they just have a different interpretation of the facts; and thus, they fully believe they are truthful.

Unfortunately, most employers feel their relationships with employees are better than they are. As a result, they need to look at situations like the above as professional and business failures. Exemplary employee relationships will minimize these situations; relationship building is often the best defense.

Thanking employees periodically for doing their jobs generates a superior return on our time. It’s an effective cost-containment technique for our labor cost; the less employees like the culture the more money it will take to keep them. Consequently, no employee should go more than three to six months without an executive or senior manager thanking him for his work.

Moreover, Thank You’s power extends beyond the immediate employee. She will assuredly talk to other employees about her experience, thus producing a ripple effect. We are making the company’s grapevine work for us.

Here is a simple, direct thank you:

Hi, Tom. How are you? Listen, I just wanted to thank you for the work you’ve been doing for me. I appreciate it. You’ve really been helping us out.

Often, employees will respond with something like:

Well, I’m just doing my job.

To which we can respond with:

Perhaps, but I know that you don’t have to show up and you don’t have to apply your total effort. So, I’m thanking you for those things too.

Occasionally, I’ve heard executives and managers say:

• If they don’t like it, there’s the door!
• Why should I do this when their paycheck is our thanks?

First, employees are under no legal obligation to show up for work; we cannot sue them for not showing. We avoid headaches when they show. Second, every company issues paychecks; every company does not issue thank you’s. They give us a competitive edge in securing and keeping talent. Third, if money is the only way we show appreciation, then money will be the only thing that motivates them. Thank you’s allow us to develop and leverage personal connections. These build a team culture and make goals more achievable.

One of the major characteristics of intuitive approaches for leadership is the dominance of intrinsic rewards over extrinsic ones. The demarcation between the two is most clear in studies of the effect of praise over money from immediate managers. A November 2009 article from McKinsey Quarterly, Motivating people – Getting beyond money, is but one example.

In addition to praise from an immediate manager, the article sited attention from leaders and opportunities to lead as two other nonfinancial rewards valued above compensation. However, the transition to nonfinancial rewards is difficult for many managers. A major reason the article gave was that “nonfinancial ways to motivate people do, on the whole, require more time and commitment from senior managers.”

While this is true, an important aspect that is rarely examined is that the tendency to praise is a function of personality. In order to praise and interact effectively, people need to have some emotional awareness and sensitivity. Just as some cars are better than others, some praises are too.

For instance, a manager who is more easily drawn to statistics, reports, information and finances might not have the personality necessary to encourage him to seek out opportunities to praise and spend individual time with employees. Moreover, while some extroverts can excel at networking a room, they can fail miserably at nonfinancial rewards. It’s one thing to have polite, congenial conversations in public but quite another to have involved, developmental discussions with an employee one-on-one. This is why some great public speakers can’t teach and some teachers can’t speak publicly.

Until companies look for personalities and aptitudes conducive to using nonfinancial rewards, overreliance on compensation to motivate will continue.

In his landmark book, Seven Pillars of Wisdom, T.E. Lawrence (aka Lawrence of Arabia) ponders why two Arabs can hold off a dozen Turks but a thousand Arabs cannot defeat a thousand Turks. He arrives at the realization that large scale armies need to be organized around the weakest link to tap the advantages that size and technology can offer. In other words, you can’t organize your army around a set of requirements that are impossible for a soldier to perform.

With this in mind, what might happen to a Special Forces combatant who is compelled to fight in the regular army? As the article, Imperial Grunts, conveys in the October 2005 issue of the The Atlantic, many of these combatants might not “fit” well in the regular army. This is what caused the Arabs to not fight well in large groups; they could not bridle their talents. This is very much like a talented athlete who is forced to sit on the bench or compelled to perform within a structure that does not allow him to express his talents.

In the workplace, the same can occur with an employee who feels the employer is not using his talent wisely. Since a large corporation is like a large army, it will tend to organize around the weakest link. Thus, he might not have the freedom to show what he really could do because he is being forced to work like everyone else does. When we combine this with managers and co-workers who feel threatened by his talent, you could easily see his talents suppressed, his influence marginalized or his actions disruptive. All could mean his departure.

A CEO of a 150-employee services company made this astute observation: processes reduce the need for top talent, and thus, reduce labor costs. This company requires highly talented professionals to deliver its services. Historically, management allowed them to work without defined processes because the employees knew what to do. However, as the company grew, finding such talent became harder and more expensive.

Processes become the path to training and developing in-house talent. They are analogous to painting by numbers or following recipes in cooking; they improve the output produced by individuals who don’t have a grasp on the entire work. However, just as we wouldn’t confuse painting by numbers with being an artist and following a recipe with being a chef, we shouldn’t confuse executing the steps of a process with being talented. Processes allow the breakdown of a task without necessarily needing to understand the task itself. It’s like following a series of directions; you don’t need to know your destination.

Since an employee doesn’t need to understand the whole task to follow a process, he does not need the talent that that understanding requires. Essentially, the process is making the decisions for him as embodied by its rules and procedures. As a result, the company does not have to pay a premium for that talent.