Can business be both caring and profitable?

Whether employers should treat their workers well or badly is one of management’s oldest questions. “The wages of him that is hired man shall not abide with thee all night until the morning,” says the book of Leviticus, but many employers have concluded that there are financial advantages to holding on to, or cutting, their workers’ wages.

There are two arguments for treating employees decently: the first is that it is right, and the second is that it is profitable. It says something about the moral environment that most advocates of treating workers decently feel obliged to rely on the second argument rather than the first. The problem with the second argument is that there have been many cases throughout history where it has been more profitable to treat workers badly. Slavery was hugely advantageous to plantation owners who needed dirt-cheap labour. The mining industry in South Africa was made possible by cheap labour and the apartheid laws that brought black workers to the mines, where they were housed in bleak barracks, while forming their families to stay home in impoverished rural areas of neighbouring countries.

Most North American and European manufacturers of clothing, shoes and toys have closed their factories in their own countries and moved the jobs to the developing world, where people work for wages but under conditions that no westerner would accept. Those few companies that have attempted to maintain manufacturing employment in the developed world have found their prices undercut by competitors that have found people prepared to work for far less. So how can one mount an argument that treating employees humanely is both profitable and right? Most of the writers who attempt to make the case usually concentrate on the kind of skilled jobs now prevalent in developed countries, many in professional services, research and high technology. Even here, it is not always clear that treating workers well makes business sense. One of the most detailed attempts to prove the case for decent human resources policies was made by Brian Becker of the school of management, State University of New York at Buffalo and Mark Huselid of the school of management at Rutgers University.

The writer’s research was based on the practices of 3,000 publicly held companies. They created what they called a “High Performance HR Index” which put together 20 to 30 questions about each company’s human resources system, ranging from “hours of training provided to new hires” to “the number of employees who regularly received a performance appraisal.” The researchers not only asked whether companies had such policies; they also tried to evaluate their effectiveness. So, instead of asking about the percentage pay increase that employees received, for example, they asked what increase a high performer received compared with a low performer. They conceded that it was difficult to isolate the effect of human resources policies, but their research appeared to indicate that sophisticated HR policies did make a difference to the companies’ market value per employee. Not all such surveys produce results that are clear-cut. Late last year, PwC, the auditing and business services firm, looked at the human resources strategies of 1,000 companies in 47 countries.

At the most basic level, PwC found that companies that had written HR policies — 60 percent of the total — had higher revenues per employee than those that had no written policies, although the difference was small. PwC also found that companies with written HR policies had lower absenteeism. Absenteeism is often a rough measure of how happy employees are. Lower absenteeism can indicate that people want to come into the office, although it can also be a reflection of the availability of sick pay in a particular country. But the PwC survey then came up with what seemed like a perverse result: high absenteeism did not result in lower revenues per employee. PwC concluded that in companies with high absenteeism, companies compensated by getting the employees who did come in to work harder. But companies with lower absenteeism did have noticeably higher profit margins. PwC found no link between profit margins and employee training programmes or management development efforts. So, looking at the PwC data, the case for treating employees decently is not proven one way or the other. Perhaps it is time to go back to first principles. There are two ways to increase profits: by raising revenues or cutting costs.

Many companies concentrate on cutting costs because it is easier, and the easiest way to cut costs is to get rid of people. Their jobs can be done by machines or by people in other countries who will work for lower wages, either because they have less legal or trade union protection or because the alternative jobs available pay even less. But there are some jobs that cannot be abolished or exported. These include highly-skilled knowledge-intensive jobs — although many of these can be done elsewhere, too. Software engineering, online library services and architectural drawing are increasingly being moved from North America and Europe to lower-cost Asian countries. However, there will always be jobs — whether providing sensitive legal advice or working on a supermarket checkout — that can only be done in close proximity to the customers and it is here that treating employees well matters most.

Companies can only go so far in cutting costs. When there is no more left to cut, their only strategy is to entice more customers to come to them and to spend more. Persuading customers to part with their money, and to return, is a job best done by happy employees. Consu-mers can spot a demoralised workforce as soon as they board an aircraft, or walk up to a bank teller’s window or ask a supermarket employee for help. Unhappy staff do not even have to do anything overtly wrong; their manner and body language will tell the customers whether or not they have made a mistake by walking through the door. Happy staff will not only make that extra effort with customers; they are more likely to suggest improvements, innovations and new market opportunities. Un-happy staff will keep them to themselves. Viewed in that light, the case for treating staff well is so obvious that numbers and data are superfluous.

What of the employees in developing economies? Will they have to put up with miserable working conditions indefinitely? Not necessarily. First, some employees in information technology and professional services in Asia already enjoy good physical working conditions, even if their pay is low by North American and European standards. Competition for their services is already strong, and as more companies open facilities it will get stronger, driving up wages and improving conditions. For those stitching shoes and footballs in sweatshops, the future looks less optimistic. These jobs might be better than the local alternatives but no one can pretend this is happy work. Increas-ing prosperity might result in those workers demanding better conditions, which they might win. But employers will by then be on the lookout for cheaper locations and a chance to cut costs further. Price competition will always lead to a race to the bottom somewhere. The debate about whether to treat workers well or badly will not end soon.