MIT Sloan Executive Education innovation@work Blog

Happier employees sell more fries

The signs held by recent striking fast food employees say, “We are worth more.” They are, in fact, right. Retail employees are worth more, and paying them more can result in higher profits.

Those retailers who doubt this should take a close look at Costco, Trader Joe’s, and QuikTrip Corporation (a convenience store chain). Those firms, according to Zeynep Ton, Adjunct Associate Professor of Operations Management at MIT’s Sloan School of Management, pay their employees well—and it shows in the firms’ profits.

Ton’s research on these three retailers shows a direct correlation between paying employees well and overall corporate performance. “They complement their investment in employees with operational practices that make the execution of work more efficient and more fulfilling for employees, lower costs and improve service for customers, and boost sales and profits for the retailer. These practices allow retailers to break the presumed trade-off between investing in employees and maintaining low prices.”

The opposite is true, too. When retailers make a “quick fix” to the bottom line and chop labor costs, the payoff is only short term, and can lead to longer-term losses. As we reviewed in a previous post, Walmart is just one of many examples of retailers who cut staff and sacrificed customer satisfaction in the process.

Those against the idea of raising wages for fast food workers claim the additional costs could be passed on to consumers and/or result in outlets having to close because of declining profits. Yes, that is possible. But as a McDonald’s spokesperson, Ofelia Casillas, is quoted as saying in an email to Bloomberg News, “The majority of McDonald’s restaurants across the country are owned and operated by independent business men and women where employees are paid competitive wages, and have access to flexible schedules and quality, affordable benefits.” That fact proves that some fast food outlets do pay competitive wages and are still profitable.

So, do happier employees, in fact, sell more fries? Based on the statement above, it appears so. “When retailers view labor not as a cost to be minimized but as a driver of sales and profits, they create a virtuous cycle. Investment in employees allows for excellent operational execution, which boosts sales and profits, which allows for a larger labor budget, which results in even more investment in store employees,” said Ton.

Zeynep Ton teaches in the MIT Sloan Executive Education course, Developing a Leading Edge Operations Strategy.