You get what you pay for

Are your employees as happy as this squirrel?

We all know McDonald’s pays its employees minimum wage. But did you know that Apple Store employees make about $25k a year?  And that full-time employees at Costco make $40k a year? While both stores are seen as being exceptionally successful, they have very different operating philosophies when it comes to how they treat their employees.

Costco creates an environment that provides long-term career growth for its employees (according to a recent Businessweek article, 98% of its managers are promoted from within), while Apple does not. Rather, Apple takes advantage of its cult-like following and recruits younger folks who love Apple products and feel a “calling” to help make sure others feel the same way. But how long can people be motivated by this sense of higher purpose when the work is stressful and there is little possibility for promotion? About 2.5 years according to the New York Times (the average tenure of an Apple Store employee).

Zeynep Ton’s article in the Harvard Business Review (Why “Good Jobs” are Good for Retailers) sheds light on two paths retailers can take when it comes to their employees. Ton calls the first path a vicious cycle and the second a virtuous cycle. The vicious cycle starts with not investing in employees. This leads to hiring unmotivated or unqualified employees, which in turn hinders operational execution. Unmotivated employees are not likely to put products in the right places or do what is necessary to satisfy customers. And, not surprisingly, the result is a lower level of sales and profits. Even Apple Stores are not immune to this as the Wall Street Journal reports that they are starting to see decreases in sales from a year ago. There is increasing dissatisfaction among employees and even lawsuits.

In contrast, Ton suggests that retailers adopt a virtuous cycle. This starts with investing and empowering employees, which in turn leads to a qualified and motivated workforce. Such a workforce will do what is needed to get things done and typically this means customers walk out of the store satisfied. And the result is that the retailer has higher levels of sales and profits. In addition to Costco, Ton cites Trader Joe’s as an example of a firm that benefits from this virtuous cycle.

Trader Joe’s pays its full-time employees $40-60k a year and its sales per square foot are 3x that of other grocery stores. And here’s an article about a thriving restaurant in Detroit that is paying its employees $12/hr and finding that the employees that can be hired at that wage are extremely hard-working and efficient. Their net increase in labor costs is offset by an increase in sales – exactly what is supposed to happen in a virtuous cycle.

What shall we learn from this? Well, first it looks like those folks in the Hawaiian shirts might be the real geniuses here. More importantly, a good piece of advice for those of you currently running or hoping to launch a retail store is that it’s prudent to invest in your employees and kick-start the virtuous cycle.

The preceding was a post from Dr. Atul Teckchandani, one of the great professors teaching Entrepreneurship at CSUF.

[Image: Wikipedia]

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