Ethical Leadership Feeding Good Business

In the highly competitive food service business it is common for the wait staff to work long, arduous hours for low pay and few benefits. Most employees are paid at barely minimum wage levels and must “live” on whatever tips they receive. There is nothing illegal or unethical with this approach, but with these conditions it is no wonder that the restaurant industry suffers from annual employee turnover rates that often exceed a staggering 150 percent.

Most executives of restaurant chains are concerned about their employees and would dearly love to reduce the high costs of turnover, but feel trapped by the rules and peer group pressure of the industry business model. Talk to many Bob MacDonald on Ethicsrestaurant executives and they will tell you that because of extremely thin margins, keeping the cost of sales, i.e. employee costs, competitive can be the difference between profit and loss. The irony is that the cost of finding, hiring and training a restaurant employee can approach $2,000 per individual and, with high turnover; it has a dramatic impact on the cost of sales. The good news is that turnover costs are one of the few items that can actually be impacted by management. If a company can find a way to significantly reduce turnover, expenses will decline and profits will increase incrementally. However, to do so, management must be willing to explore ways to break out of the mold for restaurant operations and apply ethical leadership skills.

Case in point.

The Wall Street Journal (Managing – Aug. 31, 2009) ran an article titled, “Burger Chain’s Health-Care Recipe.” The article profiled a regional restaurant chain – Burgerville – in Vancouver, Wash. Four years ago the owners of the chain agreed to pay at least 90% of health-care premiums for employees who work at least 20 hours per week.

The article cited People Report, a research firm, pointing out that less than half of all restaurant chains even offer health-care options for part-time hourly workers and those who do, pay, on average, less than 50 percent of the cost for employees working at least 30 hours per week.

The Journal article noted that the initial expense for absorbing 90 percent of employee health-care costs nearly doubled Burgerville’s annual health-care bill, from $2.1 million to $4.1 million. But here’s the good news: Executives at the chain were quoted as saying that the plan, “paid for itself and more.” They pointed out that turnover declined from 129 percent in 2005 or 54 percent in 2006. (Turnover is running at 52 per cent in 2009) Reducing the cost of replacing employees virtually matched the cost of subsidizing employee health benefits.

But there was more.

CEO Jeff Harvey said he believes employees work harder to qualify for more hours, which are assigned on a priority system based on performance. Once news of the generous health-care benefit became known, it was easier to recruit higher quality, experienced employees to the chain. He indicated that the higher work ethic of employees combined with the lower turnover translated in significantly increased sales, revenues and profits.

And the Moral of the Story …

To be fair, Burgerville is a small, regional firm with only 39 locations. Executives with larger, national chains may claim that Burgerville’s approach to reducing turnover would not work with larger companies. And, they may be right (although I don’t think so), but that is not the point.

What we have here is an example of a CEO who was willing to go against the rules of his industry and the way his peers operate. He was open to using the ethics of doing the right thing – providing affordable health-care for his employees – and courageous enough to do what others would not. His company’s reward:  significantly increased performance and results.

I do not fault the executives of the restaurant industry who, for the most part are ethical leaders doing what is expected to be done. That is what we are all taught to do. But, I do salute those who are willing to go beyond ethics; those who question the way things should be done and exhibit the courage to do more than is expected and to be rewarded for becoming true ethical leaders.

More leaders – in all industries – should try this approach.

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