Operating on the cheap – especially with workers – is a recipe for higher costs and lower profits.
There was a telling article (at least I thought it was) in a recent issue of The Wall Street Journal. The story focused on the giant insurance company Aetna, Inc. that announced it was increasing the minimum pay of its workers to $16 an hour and that it would also begin to subsidize health insurance costs for its lowest paid workers. Aetna estimated that these changes will impact as many as 7,000 workers.The Aetna CEO Mark Bertolini was quoted in the article taking credit for what he called a forward-looking and compassionate attitude demonstrated by this action.
I applaud these measures and give Mr. Bertolini the benefit of the doubt (of which there is much) that his motivations are sincere and well-intended, but at the same time have to ask: Where have you been all this time?
Is the CEO not at all embarrassed to admit – let alone promote the fact – that a white-collar company like Aetna has 7,000 workers earning less than $16 an hour? In fact, the move to increase minimum pay to $16 per hour represents as much as a 33 percent increase for most of the workers. Meantime, subsidizing health care costs (and remember Aetna is a health insurance company) will save these low-paid workers up to $4,000 a year, money that was coming out of their already low pay.
As welcome as these changes are, they should be put into some perspective. Aetna estimates these pay and benefit adjustments will increase company expenses by $25 million per year. That is no small sum, but keep in mind that Aetna’s projected revenues for 2015 are $62 billion and operating profits are estimated to be at least $2.4 billion. So these increased costs represent less than one percent of company profits. And what does Aetna expect to receive in return for these increased costs? Well, in reality, the executives ruling Aetna don’t believe it is going to cost the company anything. The Aetna CEO admitted that the annual turnover costs for these lower paid workers is $120 million and he believes the higher compensation will allow the company to attract better quality workers, improve productivity and significantly reduce turnover. Dah!
The end result of this action taken by Aetna is good, but the hypocrisy inherent in the motivation for the company to act grates like a sandpaper diaper. Mr. Bertolini pretentiously offered this explanation, “It’s not just about paying people, it’s about the whole social compact. Why can’t private industry step forward and make the innovative decisions (like I have) on how to do this?” It is good that Mr. Bertolini has discovered his “social conscience,” but disappointing that he did not seem to care about 7,000 of his employees earning wages at the edge of poverty until he figured out that it was actually costing Aetna more in increased expenses and reduced profits than what the company saved by treating employees on the cheap.
There is another telling point in the Aetna action: In further justifying the decision to increase the pay of low-income workers Mr. Bertolini said, “We’re preparing our company for a future where we’re going to have a much more consumer-oriented business and Aetna wants a better and more informed workforce.” Ah, so here is the leader of one of the largest health insurance companies, serving hundreds of thousands of customers, not only admitting that thousands of his workers have been earning barely a minimum wage, but also that there has been little focus on customer service. The logical conclusion is that something else must be motivating a company that previously cared little for its workers or customers, to change.
You don’t suppose that Obamacare – that compels companies to compete for business on an open exchange – had anything to do with the decision of Aetna to become more “customer-oriented?” And that to do so, the company needed to attract and keep workers motivated to put in the effort to provide better service? Na! These actions had nothing to do with competing under Obamacare; they did it because it was about the “social compact” obligations Aetna recognized it has with its employees and customers. Would you like to buy a bridge?
There is no intent here to single-out Aetna and mock the hypocrisy it has exhibited, because the company is the rule, not the exception. There seems to be an abiding belief held by the executives of most companies that funds used to recruit, train, develop and compensate workers are a cost, not an investment. Companies will often tout their investments in research, technology, equipment and plants, while, at the same time, highlighting efforts to control and reduce labor costs. The attitude is to go first-class on the things that are intended to bring success, but to go steerage-class when it comes to the people who make the things work. Attracting, training, motivating and rewarding labor (people) should be considered just as much of an investment in the success of the company as buying new equipment; but rarely do company executives embrace that view.
It’s strange that executives understand that going on the cheap for research, technology or equipment can result in higher costs and lost opportunity in the long run, while not recognizing that going on the cheap when it comes to employees can have the same result.
This attitude was observed first-hand when, for a number of years, I served on the board of directors of a fast-growing national restaurant chain. The company was well-led by the executives and has grown to over 1,000 restaurants nationwide. As well as the company has done, it missed the opportunity to do even better, by falling into the trap of viewing “labor” as a cost, not an investment. It is a mindset that can be especially counterproductive when the employees are the face of the company, such as in the restaurant business.
No one at the company or on the board questioned the company expending millions in food research, new concepts for its restaurants, advertising and marketing; these were all viewed as investments in the company’s future. At the same time, members of the board were fixated on controlling and reducing labor costs. The directors, who were each being paid well over $100,000 per year (for four meetings)voiced no concern that the vast majority of the 15,000 restaurant employees were being paid at minimum wage levels.
Quite to the contrary, any hint of an increase in minimum wage by any state or the Federal government, would move the board to apoplexy. For the directors, any suggestion of an increase in the minimum wage was considered more threatening than an outbreak of Ebola in the restaurants. Employees were viewed as a cost, not an investment; and anything to control or reduce that cost was good. Despite the fact that annual employee turnover hovered at 130 percent and that costs for recruiting and training a constant parade of new employees that ran into the millions of dollars each year, there was no willingness (or ability) on the part of the directors to connect the dots.
It has long been my belief – and I started a company to prove it – that when it comes to a company’s success, people are more important than things. Companies have a better chance to stand out from the competition, achieve ultimately lower costs and be more successful if the employee is viewed as an investment, not an expense. I learned from experience that when employees are considered and treated as a major asset and an investment in the future of the company, they will respond accordingly. When a company has a culture that treats employees with respect, is willing to invest in their development and compensate them for the value they add, then high-quality workers are attracted. And these workers become motivated, loyal and productive.
And the Moral of the Story …
When the leaders of a company adopt the belief – as a core of the culture – that employees are an investment rather than a cost, they discover that not only do overall costs decline, but the return on the company’s investment in the employees generates a return far greater than any other investment the company could make. Maybe, just maybe, Aetna is learning this lesson.