Profit at the Bottom of the Ladder: Creating Value by Investing in Your Workforce [Hardcover]

Henry Ford revolutionized labor practices when his raised employee wages well above industry standards so his employees could afford to buy his cars. Since that time however executive attitudes to front line employees have been anything but revolutionary. Until now, Jody Heyman's Profit from the Bottom provides a well-researched book that clearly explains the value of raising wages and benefits of those at the bottom of the pay scale.

Profit from the Bottom refers to your lowest paid employees those frequently on the production line. Heyman's point is that these workers are frequently seen as an input cost to be managed rather than a resource to create value. Throughout the book's chapters, the case studies prove that if you increase compensation in the front line in the right way, you will gain increased productivity, quality and success.

The book provides the implementation details you need to understand how to raise wages, productivity, quality and cost. Success is not just as simple as raising wages, rather it is the way you raise wages, etc that matters. This book takes the time to explain how practices like a team based organization, pay for piecework, stock vesting, etc work.

The book is recommended reading, particularly for Human Resource Leadership and Chief Financial Officers who too often hold a view that your people are a cost to be managed rather than a resource that can enhance your enterprise.

Strengths

This well-researched book looks at the complex issue of employee compensation. It debunks the perception that front line workers are a cost to be minimized.

Comprehensive case studies clearly illustrate what it means to offer employees compensation, participation in wealth building, health benefits, etc.

The cases cover well -known companies like Costco as well as smaller companies in the U.S., South Africa and Europe. It is particularly impressive that these cases include negative examples and challenges as well as success stories.

The author allows company executives to speak for themselves through extensive quotes that help you understand how these approaches work.

Challenges

The book repeats its argument in most of the chapters that paying people at the bottom better led to greater productivity and results. The repetition leads you to believe that the chapters were written independent of each other that detract a little from the book.

This is an academically based book with a detailed discussion of the research methodology and an academic tone. It is not a major issue and while I believe that the academic approach is responsible for many of the book's strengths, it is a factor for those used to reading business books.

The book takes a progressive view and liberal tone, which is understanding given the background of the author and the subject area. It is a factor in reading the book that may cause some business leaders to turn off.

In collaboration with Magda Barrera, Jody Heymann set out to answer "three fundamental questions. First and foremost, [the material in this book] answers the question C-level executives and other senior managers are asking themselves: Are there additional ways to increase my company's success? The case studies [more about them later] answer young business leaders who are wondering: Can I spend a career profiting in the private sector while bringing benefit to others? At the same time, this research answers the question raised by labor representatives and all levels of employees: Isn't there a way for the company and its employees to succeed together? The answers to these three questions are central to the lives of everyone from senior managers in the largest companies to entry-level employees in the smallest firms."

Improving the lives as well as the working conditions of the least-advantaged employees while becoming more profitable is exactly what the exemplary copies discussed in this book have done. " Their approaches, which include raising wages, rewarding productivity with string earnings and profit sharing opportunities, providing paid leave and flexibility, providing health care, and many other benefits are frequently allotted to employees from the middle to the top of the corporate ranks, yet they are truly rare for the lowest-level workers. To take just one example, profit sharing is available to less than 1 percent of those in low-level jobs.

The exemplary companies include:

ACC India: Building a country and a company hand in hand
American Apparel (U.S.): Paying American wages in manufacturing
Autoliv Australia: Designing flexibility on the factory floor
Banco de Crédito del Peru: Training for all

Costco (U.S.): Two separate initiatives
-- Providing higher wages as part of a corporate strategy
-- Career trajectories without strict ceilings

Costco Wholesale (U.S.): Investing in jobs in advanced economies

Dancing Deer (U.S.): Three separate initiatives
-- Profit sharing as a way for small firms to increase compensation and productivity
-- Building human capital
-- An informal approach to structuring engagement

Great Little Box Company (Canada): Achieving employee engagement

Isola (Norway): Three separate initiatives
-- Meeting and exceeding national requirements
-- Training employees to keep up with the change
-- Moving to a teamwork method of production

Jenkins Brick (U.S.): Two separate initiatives
-- Managing through incentives
-- Traditional and uncommon approaches to asset building

Novo Nordisk (Denmark): Two separate initiatives
-- Training in a global context
-- Manufacturing in China

SA Metal (South Africa): Health care amid the AIDS pandemic
Xerox Europe (Ireland): Making advancement accessible to all

Note the diversity of projects to which these companies were committed. The details of each are revealed in case studies provided in the book, some of which are really mini-case studies. However different these companies may be in most respects, however different their efforts to improve the lives as well as the working conditions of their least-advantaged employees may be, there are common lessons to be learned from all of them that Heymann identifies and discusses in Chapter 9, "Creating Good Working Conditions Throughout the Supply Chain." Here are the steps she recommends:

1. Establish codes of conduct to set the rules of the game
2. Integrate labor standards into company culture
3. Select committed factories and suppliers
4. Monitor and enforce labor standards
5. Support countrywide strategies
6. Provide consumers with labor standard information through product labeling

Then in the next chapter, "Developing a Blueprint," Heymann identifies "five changes needed in corporate strategy" (e.g. Leaders need to understand who performs the majority of essential work at their firm") and then "five practical steps necessary fir profiting together" (e.g. "Train employees at every level of the company"). It is far easier to identify the "what" that must be done to create value by investing in a workforce than it is to explain HOW. Jody Heymann is to be commended on how well she does both.

She concludes her book, suggesting that these corporate leaders "provide not only the foundations of a blueprint for other companies, to build on, but also the beginnings of s blueprint for whole economies to learn from. While there is still a great deal to be discovered about the most effective ways for companies, countries, and employees on every rung of the ladder to profit together, these leaders have laid out a vision and demonstrated the practicality of bringing economic success to companies by supporting - rather than eroding - the success of men and women at the bottom of the ladder."

The following is an article review I did on the book for my MBA program. Much of the content is good, but the framing of the argument is based on compassion rather than economic interest. I gave it 3 stars because the research is good and can be applied in many workplaces. It lost 2 because of the disingenuous sociopolitical undertones. It would have been stronger, IMHO, if the authors had allowed the research to speak for itself rather than applying in an irrelevant context, i.e. to global wealth and asset distribution.

Building Assets to Ensure That the Lowest-Level Employees Are Not Left Behind begins by employing an incomplete comparison fallacy to create the false argument that inequality in international wealth and asset distribution justifies profit sharing in America. This red herring encourages a moral or compassionate response to distribute profits by using extreme statistical metaphors and emotionally-charged words like "grievous" and "inequality" (Heymann & Barrera, 2010). It also appears that this argument essentially uses proportional comparisons to emphasize wealth inequality as a human rights issue. This use of ratios, however, avoids discussion of actual income improvement, and absolute income. The initial phrasing of the article's argument is unfortunate, because ultimately, profit sharing can be used as a good motivational incentive.

The assertion that this article's argument is framed to push a social agenda is bold, but logically follows Dr. Heyman's research and other works. She recently excoriated the U.S. labor market because it does not guarantee the same social amenities as other UN nations (Heymann, 2010). These benefits included: paid leave for new fathers, breastfeeding breaks, and a weekly day of rest. According to Dr. Heymann's professional biography, she researches and teaches public- and social policy (Jody Heymann, 2011). Most striking are her actual words, "low income employees are at a significant disadvantage...it is grossly inadequate for our national policies to be framed on a private, voluntary system for employers. It hasn't worked so far, and we can't expect it to work in the future" (Heymann, 2000, final paragraph). Clearly, Heymann's intent is influencing social and political policies, and not providing insight into human resource management or economics.

Heymann employs proportional comparisons and extreme examples in (Heymann & Barrera (2010) to elicit an emotional response from the reader, which is consistent with her other works (Heymann, 2000). Hearing that the top 1% of the population holds 33.4% of the wealth is enough to create anger, jealousy, and subsequent cries for equality and social justice in some ill-informed Americans. Heymann's research method is grievously flawed, and the fact that Dr. Heymann is an experienced researcher creates suspicion as to the underlying intent of her intellectual dishonesty.

First, her research method is flawed because percentages of wealth distribution do not describe the absolute positions of the poor. In other words, even though poor Americans have a lower percentage of gross income than the poor in some other countries, their absolute income is far higher. Heymann mentions that the bottom 50% of the Chinese holds 14.4% of their country's assets, with 2.8% being the figure for the U.S. (Heymann & Barrera, 2010). Per capita GDP in China is only $4,260 compared to $47,140 in the U.S. (China GNI, 2011; US GNI, 2011). The lowest paid occupation in America is the fast food worker, who earns about $18,120 a year (Lowest paying jobs, 2009). Even though the American poor hold a smaller portion of the assets, they eat from a bigger pie. Poor Americans are far better off than poor Chinese regardless of their relative asset holdings.

Secondly, Heymann fails to acknowledge the movement in individual income over time. A University of Michigan study shows that 95% of households that were poor in 1975 were no longer poor by 1991, which indicates that Americans persistently and universally improve their positions in life (Williams, 2006). So much so that America's poor is the "envy of the world's poor" (Perry, 2007). Heymann's statistics say nothing about the opportunities that already exist in America's labor system.

Third, Heymann laughably alleges that America's asset disparity contributed to a gap in home ownership that created vulnerability to the 2008 subprime mortgage crisis (Heymann & Barrera, 2010, p. 2). In 2007, 45% of America's poor owned homes (Perry, 2007), compared to 68.4% of all Americans (Home ownership rates for the US, 2007). In reality, there was not much of a gap at all. She also alleges that this notional "gap" circuitously led to the sub-prime mortgage crisis. Many economists agree that the crisis was caused by the US government subsidizing risk, which encouraged over-investment in housing and risky mortgage-backed assets (Miron, 2011). If anything, the mortgage crisis contributed to the asset gap, because poor people lost their homes, while the rich cut their losses (Streitfeld, 2010).

The article's framing argument would have been more convincing had it appealed to the economic benefits of profit sharing, which the examples do quite well. In stark contrast from the beginning interlude, the Jenkins Brick (JB) and Dancing Deer Baking Company (DDB) examples illustrate how profit sharing can reduce turnover and increase productivity. These are economically sustainable outcomes that justify profit-sharing incentives as a mutually beneficial incentive for the businesses and their workers. This economic arguments of reducing turnover costs and increasing profitability appeals to the sensibility of business owners, economists, and accountants alike. They are economic objectives, and should be discussed as such.

It can be assumed that Magda Barrera is responsible for the bulk of the actual research; she has a bachelor's in economics, and her research focus is improving working conditions in economically sustainable ways (Magda Barrera, n.d.). In this article, she shows examples of fundamental economic principles - namely incentives - working in a capitalistic society. This concept of the "incentive" is a fundamental concept of economics, which underlie the remainder of this discussion.

Economics, capitalism, and trade depend on incentives. In economics, "an incentive motivates action by consumers, businesses, or other participants in the economy" (Incentive, 2008). A wage is an incentive to work. The meat of Heymann & Barrera (2010) is its thesis on human resources techniques that act as mutually-beneficial economic incentives and create favorable socioeconomic outcomes. The outcomes that specifically build employee assets are the 401(k) plan at JB and DDB's stock options. These benefits build assets by encouraging employees to save capital. The asset-building capacity of each plan depends solely on the employee's ability and intent to keep the money in the plan. If the employee chooses to withdraw and spend the money on a non-asset, then no actual asset-building has taken place. However, saved money is only one facet of the actual asset growth that has occurred.
A company's employees are often referred to as its most valuable assets. The value of these resources depends on the concept of human capital. Human capital is the sum value of an employee's job skills, knowledge, education, and experience (Becker, 2008). Reducing turnover builds a company's human capital by retaining the experience, skills, and knowledge that are built over time.

Encouraging innovation also helps a company build its assets. The most popular and often quoted ideas from Adam Smith's work The Wealth of Nations is The Invisible Hand. This is the notion that a business can inadvertently do good for society even though it is operating in its own self-serving interest (Minowitz, 2004). They create jobs, pay taxes, and so forth. Smith's observation that the most successful societies were that allowed individuals to focus their ingenuity on problem solving and innovation supports the economic reasoning of profit sharing. All things being equal, a country -or company in this case- that encourages innovation will be more successful than those that do not. Dancing Deer Baking Company effectively harnessed its human capital, innovated, and solved a packaging problem. Though simple, these small innovations in sum contribute to a company's success or failure.

The final economic concept discussed in Heymann & Barrera (2010) is price. A wage is conceptually the price an employee charges his employer for his time, effort, and the use of his human capital. In a purely capitalistic economy, i.e. without price fixing, a price is a metric that describes consumer demand, or value; ergo, a worker's wage is a metric of the value of his work. This is basically true in the case of a salesperson who is paid solely on commission. This system rewards people who are productive. Those people who work hard, have talent, have good ideas, and gain skills earn more and become more successful (Hessen, 2008). Profit sharing is simply another type of commission. It creates a framework whereby a worker or team of workers can be rewarded by the fruits of their labors. By creating value through innovation, and additional production, the employees at DDB were able to commensurately raise the value of their time. The profit sharing plan was essentially a financial feedback mechanism to reward employee productivity.
Are these incentives long-term in nature, or short-term?

The incentives covered in Heymann & Barrera (2010) appear to be economically sustainable (long-term). Jenkins Brick reduced turnover by approximately 50%, which positively impacted safety, quality, and training costs (Heymann & Barrera, 2010). It also improved the company's reputation, which lowered recruitment costs. Dancing Deer Baking Company was able to retain personnel while paying low wages. The company also increased productivity and profits. Each of these business improvements can be sustainable if managed correctly.

The permanence of the incentives themselves depends on its cost-benefit analysis. Each company must weigh the costs of disposing of a program against the costs of keeping it. The program should remain in place inasmuch as its ability to create a positive return, social or financial.

As evidenced by the JB and DDB examples in Heymann & Barrera (2010), company size is irrelevant. One company was on its fourth generation of management, and one was a startup. This is the wrong question.

The benefit of a profit-sharing program depends more on the nature of the work than the age of the company. Manufacturing companies that require high amounts of hands-on labor can realize significant production gains if workers increase their efforts. The marginal value of a 5% increase in effort can easily create a 10% increase in profits when considering the marginal benefit of the production boost. The same holds true for retail sales, fast food, and some service occupations. When profits depend in large part on the efforts of the employee, increasing those efforts will increase profits. There are also occupations where the marginal benefit of a profit sharing plan would be near zero like a movie theater usher, parking lot attendant, or a dog shampooer. More effort on their behalf would not likely change productivity, and if these individuals fail to perform they are easily replaced.

Both JB and DDB are manufacturing companies that employ relatively low-skill low-wage workers. This drives home the social benefit of the profit-sharing programs, because these economic groups are least likely to ever attain a higher wage and standard of living. It is important to consider the economic value of this social benefit when considering a profit-sharing plan, because intentions are not results. Each program must be evaluated by its results and not the intentions of its creator or advocate.
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References

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Heymann, J. (2011). Who's who in work and family: Jody Heymann. Boston College. Retrieved September 15, 2011 from: [...]
Heymann, J. & Barrera, M. (2010). Building assets that ensure the lowest-level employees are not left behind.

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Incentive (2008). Economics Glossary. Retrieved September 16, 2011 from: http://glossary.econguru.com/economic-term/incentive
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Minowitz, P. (2004). Adam Smith's Invisible Hands. Econ Journal Watch, 1(3), 381-412. Retrieved from EBSCOhost.

Miron, J. (2011, August 22). Top 3 common myths about capitalism. LearnLiberty. Retrieved September 15, 2011 from: [...]

Perry, M. (2007). More on the U.S. poor getting richer, and being the envy of the world's poor. Retrieved September 15, 2011 from: [...]

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