Author Talks: Empower employees, reduce turnover

In this edition of Author Talks, McKinsey Global Publishing’s Elissa Bandler chats with Zeynep Ton, professor at MIT Sloan. In her new book, The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work (Harvard Business Review Press, June 2023), Ton examines the positive impact of targeted job strategies on performance, productivity, and profit. An edited version of the conversation follows.

Why did you write this book?

I chose to write this book because in my earlier research, I found two different approaches to profitability for low-cost retailers. The dominant approach was to see employees as a cost to be minimized and to invest very little in people over market pay, which is oftentimes unlivable pay. Consequently, this means operating with high employee turnover. Companies that use this approach worked in ambitious cycles where their high turnover led to lots of operational problems, customer service problems, reduced productivity, reduced sales, and more. But they were profitable. They continued to be profitable by growing and adding more products and services. That was a dominant approach.

The other, less used approach was to see people not as a cost to be minimized, but as the drivers of value, profit, and customer service. In that case, the goal was to invest heavily in them—pay a lot more than the market wages and operate with very low turnover. These companies also made the employees’ work a lot more valuable to more than pay for the investment in them. They operated in a cycle of low employee turnover and high performance.

When the book came out, I was expecting some pushback. Instead, so many leaders—from the world’s largest companies to dog-walking businesses—reached out and said, “Hey, we are living in that vicious cycle, and we want to get out.”

But they don’t know how to get out. So how do we make a case for change, and what changes do we make first? I wrote this book to help those leaders get out of their vicious cycle and to create a better system for their customers, employees, and investors.

I was approached by many readers. With the help of Roger Martin, cofounder and chairman of the Good Jobs Institute, and one of my former students, I was able to start the Good Jobs Institute, a nonprofit organization where we work with dozens of companies that want to make this change happen. The Good Jobs Institute became my lab where I was able to apply my academic research in the real world and see what works, what doesn’t work, and how we make this change. This book is about what we learned.

What surprised you in the writing and research process?

There were two big surprises. One is how the research-based vicious cycle that I described in my first book, The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits, was so much worse than we could have estimated from our perspective as researchers.

As we worked with companies through the Good Jobs Institute, we saw that once companies operated with high employee turnover, they created vulnerable and out-competitive systems. As a result, there were so many things they couldn’t do. I call them “corporate disabilities” in the book. High turnover and understaffing go hand in hand, and once companies operate with both, they can’t hire the right people and train them well. They also can’t empower frontline employees, because they don’t trust them. There’s a mistrust loop that prevents them from managing capacity well. Also, they can’t develop strong managers, and they can’t keep expectations high. There are a lot of “can’ts.” I was surprised by how many good management practices they couldn’t implement once they had high turnover. That was the first surprise.

The second big surprise was that I was startled and touched by how badly people in all parts of the organization want to embrace this change. Change is difficult; system change is even harder. But so many functions—headquarters functions—are anxious about starting this journey and creating a company that is customer focused and frontline centered. They can’t wait to start this journey. Their enthusiasm and willingness to do this was surprising to me.

What is the ‘good jobs system’?

The most important thing about the good jobs system is that it is an integrated system focused on improving value for the customer. Once companies make improving value for the customer a priority, then operating with employees who come and go, who are not capable and are not motivated, is unacceptable for them.

The first component of the good jobs strategy is to make a heavy investment in people—a lot more than your competitors might. There is a second component of the good jobs strategy, which is related to the first one and works well with it. It is an operational design that increases the productivity of employees and enables them to serve customers well. This operational design has four different choices: focus and simplify, standardize and empower, cross-train, and operate with slack.

These are the four operational choices of the good jobs system. I also emphasize the difference within mental models of these companies versus others. For example, consider focus and simplify. Typically, in a company that’s not operating with the good jobs system, there is a constant addition of new products, new promotions, coupons, or this or that to increase sales, even when those new additions might compromise the value companies want to offer to customers.

And in many companies, there are also functions at the headquarters, adding new pilots, new tools, and new technologies to the front lines. These front lines are burdened with having so much of that operational complexity. The focus and simplify companies that adopt a good jobs system have tremendous discipline in creating value for customers.

So they only add what adds value to the customer, and they’re careful about positioning their employees so that they can serve the customer well. When people at the headquarters are making their decisions, they think, “How does this decision enable the frontline employee to serve the customer well?” They simplify all those base rules and low-value end activities. They respect workers’ time and really enable employees to serve customers well. That’s why “focus and simplify” is the first choice.

The second choice is “standardize and empower.” Again, the mental model of many companies is to control as much as possible and to remove decision making from the front lines. This is especially the case for companies that operate with high turnover and can’t trust the front lines.

Companies that are in the good jobs system want to leverage their employees’ full potential, capability, knowledge—everything they know—so they standardize. They standardize a ton, but they also involve their employees in creating those standards and empower them to solve their customers’ problems. These companies empower their employees to have ideas to improve the system. This combination of standardization and empowerment both increases productivity and contribution of workers, enabling companies to pay them more. Now their job is a much better job because they can shine in front of the customer.

The third choice of the good jobs strategy is “cross-train.” Again, companies that view their employees as a cost to be minimized either have very specialized roles or ask people to do too much.

With the good jobs system, the objective is to create productivity and ownership. These companies cross-train their employees to perform both customer-facing tasks and noncustomer-facing tasks to create flexibility so they can react to changes in customer demand and create ownership in a specific area.

The fourth choice is to “operate with slack.” Again, companies that see employees as a cost will want to have as few people as possible get as much work done as possible. But that leads to mistakes, burnout, and various customer problems. Companies that focus on the customer want to react to changes in customer demand, so they need to have slack in their systems. They also need to enable employees to have time for continuous improvement, to hear what customers want, to hire better, etcetera. This is an entire system, and the system works well.

What are executives missing by not being on the front line?

One of the first things I tell my students on the first day of class is, ”During your last year at MIT Sloan, try to get a frontline job and work as a part-timer.” I give them that advice for two big reasons.

The first reason is that I want my students to work on the front lines so they see how the upstream decisions they’ll make as managers and as executives in the future affect the work of the front lines.

In so many instances, we see how decisions that are made by people working in product design or strategy, marketing, sales, or logistics affect the frontline work and make it difficult for frontline employees to do a good job and thrive in front of the customers. I want my students to feel that. This way, when they are in these positions, they’ll think of how this decision impacts the frontline workers and the work they do.

The second reason is for empathy and humility building. I want my students to be able to work with frontline employees, understand who they are, understand where they’re coming from, and also understand all the good ideas they might have.

Some students are surprised at how many good ideas can come from the front lines and how few of them are implemented. That is because there is not a system for implementing those ideas.

What information gets missed when companies rely solely on data and models to make decisions?

There are two problems with relying so much on data.

The first problem is our desire to make business a science and identify cause and effect in isolation. The outcomes of so many decisions that companies make are not determined by inescapable laws of science. They’re determined by the actions of leaders who have agency to affect those outcomes.

The second problem with data is that when you make analyses, you oftentimes rely on historical data, and you make inferences using historical data analysis. But what happened in the past, in your past system, doesn’t predict what can happen in the future if you have a different system.

Let me give one example. Companies might ask, “What is the return on investment in pay increase?” “What happens to employee turnover? What happens with this or that value raise pay?,” looking at that pay in isolation.

In one of our workshops, a company member posed this question verbatim: “All else being constant, what happens when you raise pay?” The company found that pay has an effect on turnover, reducing turnover. Yet the effect was so little. It was a single-digit increase, decrease in turnover. Again, companies that adopted the good jobs system didn’t just increase pay, they created a whole new system. They were able to reduce turnover by 25 percent or by half.

Looking at the past, you can’t determine what the future impact will be. If we analyze past data, we would have never been able to imagine a system where we could have increased efficiencies that much. So that’s the danger: relying so much on models and not realizing that you have agency to change those outcomes.

Here’s one example from a senior-living healthcare organization. Companies might look at past data and say, “What happens when we increase our staffing levels?” This is an analysis that companies make all the time.

They might realize, “When we increased our staffing levels previously, it didn’t improve profitability, but it reduced profitability.” But what they’re not measuring is this: How many residents fell because there weren’t enough people to take care of them? How many residents who were not able to go to the bathroom when they had to go soiled their pants because there was no time for caregivers to take them there? How many accidents took place? How many caregivers are so burned out that they are demoralized in their jobs?

Data can tell what happens when we increase staffing levels to support profitability, but it doesn’t tell us the impact on our customers, on our employees, the overall morale, and people’s ability to do a good job. If you don’t pay attention to those elements, at some point, your organization will get hurt.

What is the benefit of implementing a pilot stage prior to full-scale implementation?

Pilots can be powerful in organizations. When they adopt a good jobs system, there are two different uses of pilots.

One use of pilots is to test whether to make a change or not. The other use is that once companies decide change is needed, they need to learn how to make that change.

For example, one of the companies that adopted a good jobs strategy wants to eliminate their overnight shift. That elimination required a logistical dance. Once the company considered eliminating the overnight shift, it would have to change deliveries. It would also have to change employee schedules. That would mean changing how the work is done, so they’d need to learn how to make that change. That gives an idea of the two different uses of pilots.

Pilots can be extremely useful for both, but they are less definitive than they appear. They don’t eliminate all the uncertainty. Sometimes pilots are used as a substitute for thinking. When we work with companies, we say, “Be careful; think before you pilot.”

How can leaders drive toward the good jobs plan?

One of the most important things that I learned working with a lot of leaders trying to adopt a good jobs strategy is how important it is to create urgency and alignment to implement the system change.

It is important to make this whole change centered around the customers. The first advice that I give to leaders is, “Don’t make this about employees; make this about customers.” The reason is that the companies that were able to successfully adopt this system made it very clear that, “In order to grow and survive, we have to win with our customers.”

“In order to win with our customers, we have to execute well operationally. In order to execute well operationally, we have to keep the employee turnover low and set our employees up for success. Therefore, we must invest in our people and make these operational choices.”

Creating that urgency is the number-one lesson that we gleaned from leaders learning to adopt a good jobs strategy. They need this to survive, grow, and align different functions. They have commissions and goals. The other big lesson is to make big upstream changes and pay investments as early as possible in your journey.

We learned about the importance of getting out of that vicious cycle. The best way to exit quickly is to make two sets of decisions, two sets of changes almost simultaneously.

The first one is more relevant for low-wage employers. Make pay investments—employee investments—as much as possible and as early as possible to start attracting better people, to keep employees. Making pay investments early on can be difficult, especially if low profit margins and labor costs represent a huge portion of your overall cost.

Here’s the second one. Along with these pay investments, look at those four choices, especially focus and simplify, cross-train, and standardize and empower. Figure out what to subtract from the workload to increase the customer experience and to set up employees for success.

Making these two sets of changes, the subtraction of workload and workload availability, as well investment in people, gets companies out of that vicious cycle and creates tremendous momentum. Once turnover is lower, and employees stay with companies and have operational stability, companies can empower those workers.

As a result, they can have stronger managers, a system of continuous improvement. Making those basic investment as early as possible is important. Those are the two huge lessons that we learned from adopting this system.

How essential is pay for frontline workers?

We oftentimes undervalue the importance of pay for workers. But when people don’t make enough to take care of their expenses—housing, transportation, childcare, basic expenses—they operate in a vicious cycle of poverty. There are millions of frontline workers who can’t make ends meet.

They operate in a vicious cycle of poverty because low pay drives stress. Low pay drives health problems, cognitive functioning problems, mental health problems. These challenges prevent employees from doing a good job, coming to work on time, being productive, and serving the customer well. Consequently, they don’t get promoted, and they operate in a vicious cycle of poverty.

Oftentimes, executives see these workers, and they realize, “These workers can’t even implement the basic tasks. They make mistakes. Even when they’re doing basic tasks, they show up, but they don’t show up on time. They don’t serve the customer well.” Executives then lose faith in those people. But it’s not that poor performance is a function of the person; it’s the function of the system in which that person operates. Oftentimes we underestimate that.