Lessons From Ikea on the Merits of Better Pay

While many American employers regard higher wages as anathema to business success, Ikea, the world’s largest furniture retailer, is thriving in the U.S. in large part because of its generous compensation. As HuffPo reported:

Under the system that the ready-to-assemble furniture maker first established in January [2015], the starting wage for any given store in the U.S. reflects the cost of living in that particular area as determined by the MIT Living Wage Calculator, which takes into account the local cost of rent, food, transportation and the like. After the second round of raises, which is slated for this coming January, all of the company’s U.S. stores will be paying at least $10 per hour, and the average minimum wage across all locations will be $11.87 — a 10.3 percent increase over the previous year, according to the company.

Rob Olson, chief financial officer for Ikea U.S., told The Huffington Post that the company is already reaping dividends from its decision to hike the wage floor and to factor in the local cost of living in doing so.

“We’re very pleased so far,” Olson said.

So what types of benefits has Ikea seen?

For one, less turnover. Although it’s only been six months since the raises went into effect, Olson said Ikea is on pace to reduce turnover by 5 percent or better this fiscal year. Holding onto employees longer means the company is spending less on recruiting and training new replacements.

Ikea is also attracting more qualified job seekers to work at its stores, according to Olson. Pay for retail sales workers in the U.S. is generally very low, with an average industry wage of just $12.38 per hour, according to the Bureau of Labor Statistics. But Ikea’s average store wage is heading north of $15. After its living wage announcement [in 2014], the company opened two new locations — one in Merriam, Kansas, and another in Miami — and the higher wages (and attendant publicity) likely helped the company lure more candidates.

“At both of those stores, the applicant pool was fantastic,” Olson said.

The Swedish multinational is seeing the same benefits that just about every company that pays its workers well enjoys: lower turnover (and thus savings from training and recruitment); higher morale and productivity; and the attraction and retainment of talented, quality employees. It should be intuitive that when people are given a stake in a company — through better wages, benefits, and overall treatment — they will feel invested enough to stick around and work hard, thus giving back to their employers. That has always been the logic behind paying executives and higher managers so well, so why shouldn’t it apply to everyone else?

While I am not keen on giving the government too much power, I am not so sure companies are any more rational or knowledgeable about the matter either. Ikea is hardly the first anecdote proving that paying and treating workers better generally results in higher productivity and thus better long-term performance. Indeed, that makes intuitive sense, whatever the empirical evidence, and it is precisely this logic that companies use to justify the high payouts to executives (though rarely to average workers who contributed to said profits as well).

And yet so many companies — the majority in fact — continue to sit on their high profits, or allocate the lion’s share to the top of their corporate structure, all the while bemoaning the high costs of turnover, low productivity, etc. Mere ignorance, short-term thinking, and pressure from greedy shareholders interested only in immediate (and ever-higher and unsustainable) dividends are among the reasons for this problem (to say nothing of a culture that values profits and ruthless commerce at all costs). Being a business does not entail knowing, let alone caring about, the psychological and economical factors involved in corporate policy.

Personally, I am of the view that if the only way you can run your business is to knowingly beggar your employees — for example, paying far less than what can reasonably sustain basic necessities like shelter and healthcare — despite being able to well afford better pay by simply allocating a little less to yourself and your shareholders, then you do not deserve to run a business. I know that is an idealistic and moralizing approach, but why shouldn’t it be, given how integral business policies are (in the aggregate) to societal well-being. If we do not want government calling the shots, than it is contingent on all citizens — especially with the most power and resources — to do what they can to behave ethically and socially responsibly (indeed, this is what libertarians and many conservatives argue: that it is on the private sector, not the public sector, to create a more just and prosperous society).

My short answer: leave it to workers themselves, via unions, co-ops, or other empowering structures, to contribute to the decision-making process of corporate policy. It is hardly a perfect system — what institution is? — but it seems to be the best and most practical alternative to hierarchical and often out-of-touch corporate models, as well as government fiat (which of course is typically no less hierarchical and aloof). Otherwise, we would have to hope that low-wage employers come around to Ikea’s position, especially as it is as much in their interests as those of their workers.
What are your thoughts?
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