Can Companies Profit From Being Good Employers?

In a recent paper, MIT Sloan’s Paul Osterman finds evidence that companies have choices about the wages they pay, and that some companies can be successful through “High Road” employment practices that result in better-quality jobs. But it's not at all clear, he concludes, that such High Road employment practices are consistent with maximizing profits.

In recent years, considerable attention has been paid to employers who provide above-average jobs for their industries yet maintain good financial performance. Researchers and policy makers have often called such companies “High Road” employers. An oft-cited example is the warehouse club chain Costco, which offers its frontline workers compensation significantly above average for the retail industry.

But in a recent paper published in the journal ILR Review, Paul Osterman, NTU Professor of Human Resources and Management at MIT Sloan and a member of the faculty steering committee for the Good Companies, Good Jobs Initiative at MIT Sloan, reexamines the claim that “High Road” employers can, as he puts it, “do well by doing good” when they create better jobs for their workers. Osterman’s article is titled “In Search of the High Road: Meaning and Evidence.”

According to Osterman, his paper was motivated by the unacceptably large fraction of jobs that today, even in a period of strong labor demand, pay poverty-level or near poverty-level wages.  The question, then, is what strategies hold the most promise for improving job quality. Many people, he notes, have argued that one promising approach is to convince employers that providing better jobs with better pay is in their own narrow self-interest.  Osterman asks whether the evidence supports this.  If this is not true, he suggests, then other approaches toward upgrading job quality should take center stage.

In his paper, Osterman finds that there is considerable research that indicates that wages for similar jobs vary by firm within an industry — suggesting that companies do have choices about the wages they pay. And, he notes, both the Hitachi Foundation and MIT Sloan adjunct associate professor Zeynep Ton have identified examples of companies that do successfully pursue a higher-than-average wage strategy in industries in which lower wages are common.  These cases, Osterman writes, “demonstrate [that] High Road employment practices in typically low-wage industries are not a pipe dream. At least some firms can make it work.”

However, Osterman argues, the cases identified are sometimes “idiosyncratic,” in the sense that the cited firms are privately held or managed by unusual founders with strong values.  Also, Osterman points out, successful case studies don’t tell us anything about companies that tried the High Road approach to employment and failed.

Osterman’s fundamental question is whether a High Road “good jobs” employment strategy is consistent with profit maximization as conventionally understood. In other words, do the benefits that may accrue to employers who pay higher wages — such as lower turnover — offset the cost?

Osterman reviews a wide range of research including studies of turnover, employee effort and commitment, the consequences of high performance work organizations, and the impact of increases in the minimum wage and local living wage ordinances.  He writes:

“A fair but harsh summary is that better pay [for workers] improves [company] performance along multiple dimensions, but the costs of increased compensation appear to be larger than the benefits and hence profitability does not increase or even remain steady. A milder summary would be that little or no evidence supports that High Road [employment] practices are neutral or positive with respect to profitability, but that the case is not closed.”

To that end, Osterman thinks rigorous additional research is needed — about how common High Road employment strategies are, the characteristics of the companies that adopt them, and the effect of such strategies on profits.