Does paying salesclerks well pay off?

When Madonna was on tour in Spain a few years ago, teenage girls turned up at her final performance wearing the very outfit she had worn for her first show. They had bought it from Zara, the Spanish retailer.

While most fashion retailers take months to introduce new product lines, Zara’s supply chain can design and deliver new clothes to its 1,500 stores in more than 70 countries within days.

In her book “The Good Jobs Strategy,” published by New Harvest, Zeynep Ton argues that Zara’s investment in staff is crucial to this speed, together with its ability to collect information from employees on what is popular. Zara’s shop assistants, for example, tell managers when customers are requesting a long-sleeved version of a particular shirt.

Ton, an academic at MIT’s Sloan School of Management, set out to discover how Zara and other successful retailers treat employees better than their rivals do, yet still deliver healthy profits and shareholder returns.

Her work focuses on low-cost retailers because they compete on price and because it is often argued that the only way companies can keep costs down and prices low is to skimp on labor costs — whether through low wages, minimal benefits or under-investing in training.

As the title implies, “The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower Costs and Boost Profits” argues that this is not the case.

The author focuses on several low-cost retailers in the U.S. that treat employees well, including discounter Costco, supermarket Trader Joe’s and QuikTrip, a Tulsa-based gasoline and convenience store retail chain. The book contrasts these with low-paying, “bad” employers such as Wal-Mart, the world’s largest private sector employer.

Salespeople and cashiers are also the two largest occupations in the U.S., even though a typical retail worker earns wages beneath the poverty level. In 2011, staff at Wal-Mart received $585 million in public assistance.

Moreover, Ton points to studies that have shown that when Wal-Mart has opened a new store, wages have tended to fall in surrounding shops.

If you had invested $100 in Wal-Mart 10 years ago your money would have grown 40%; invest in a company with a “good jobs strategy” such as Costco and your money would have tripled.

While there are likely many reasons for this difference, Ton argues that the decision to give employees low-paid jobs for which they are badly trained ultimately costs companies in lost performance — such as empty shelves, or stock recorded as being on the premises but impossible to find.

The book identifies some crucial practices that have helped model companies transform their investment in staff into higher profits. These include cross-training employees, offering secure contracts and paying them properly.

While Wal-Mart deals with erratic customer traffic by hiring staff at the last minute on hourly rates, Costco shifts employees between jobs and occasionally offers staff unpaid time off. If they do not take up the offer, Costco takes the financial hit. But staff often do opt for the unpaid leave because they have regular pay packages and benefits.

Another practice is to give workers more power. Although window displays in Zara are designed in Spain, shop assistants can suggest local improvements, sending snapshots back to head office for approval.

Ton’s advice is not limited to employment strategies. She also found that successful retailers offered a smaller range of products and fewer promotions. This helped retailers buy at bigger discounts, avoid confusing customers and forecast sales better.

Critics would argue that companies such as Wal-Mart are successful, profitmaking machines, and that without surveying all retailers it is impossible to tell whether combining good employment conditions and standardization of products really delivers higher profits growth overall or just at a few key companies.

But at a time when the complexity of workers’ jobs is increasing and labor force investment declining, this is a methodically researched retort to cutting staff and wages.

Gill Plimmer is a correspondent for the Financial Times of London, in which this review first appeared.