Many corporate leaders believe their businesses can’t compete if they invest more in their employees, and they accept a high level of workforce instability, according to Zeynep Ton, a professor at MIT’s Sloan School of Management. She thinks that’s a shortsighted view and it’s based on incomplete information.
“What I have observed is that low pay and the resulting high turnover is a lot more expensive than leaders may think,” Ton says in a Goldman Sachs Talks interview with Greg Shell, a partner in Sustainable Investing within Asset and Wealth Management. “Many leaders have never even quantified the cost of turnover,” she says.
Ton is the founder of a nonprofit organization, the Good Jobs Institute, that works with companies to understand the impact of worker turnover and develop strategies to address the problem. Among the dozens of companies, the group has worked with, employee turnover has ranged from 40% to 300% annually, and in one case as high as 400%.
“Can you imagine—can you create a team made up of players who are there for just a couple months?” says Ton, who went to Penn State University on a volleyball scholarship. She explains that many of the lessons she applies today came from her coach and from her playing experience—which included reaching the NCAA Final Four.
Ton is also the author of a new book, The Case for Good Jobs: How Great Companies Bring Dignity, Pay, and Meaning to Everyone’s Work, her second on this topic. In it, she builds on more than two decades examining some of the world’s most successful companies and how they reap benefits from strategies that show respect for their workers.
One of Ton’s principles, which may surprise some business leaders, is to operate with slack in the system. “You might ask, how could it be efficient, right?” But she argues that targeting near one hundred percent workforce capacity utilization in a variable system, “is a really, really bad idea.” When the system gets overwhelmed, employees make mistakes, customers are poorly served, inventory gets disrupted, employees suffer burnout, and managers fight fires instead of leading people. All of this costs a business down the line, Ton explains.
Smart companies see the full cost of not having enough people. They operate with slack to make sure that the shelves are always stocked, inventories are accurate, and customers are going through the checkout as fast as possible. They will also “make sure that employees have time to think about all the ideas that would improve their sales or reduce their cost,” Ton explains.
This episode was recorded on July 13, 2023.