How One CEO Improved Results By Investing in His Workers

FOver the last 40 years, America’s frontline workers have seen a shrinking share of the economy. As corporate profits and executive compensation packages have soared, employees at many of the country’s biggest companies wound up taking an effective pay cut, year after year.

For the last four decades, income growth has been slower than gross domestic product. This means that while the nation has become richer, the majority of Americans have seen their share shrink. The bottom are the worst offender. The minimum wage would have increased to $25/hour if inflation had been taken into account. It’s now at $7.25.

This is my latest book Capitalism’s Man who DiedThe dramatic shift in our collective fortunes is traced back at the time Jack Welch was the General Electric CEO in 1981. Welch transformed the business and economy over the following 20 years. He unleashed a series mass layoffs, factory closings, that destabilized America’s working class. Welch was the first CEO who used downsizing to increase corporate profitability and to embrace outsourcing in his endless search for low-cost labor.

Because GE was influential and Welch so accomplished in his prime, these strategies quickly became corporate America’s de facto law. We all live today, over two decades later than Jack Welch retired.

However, today there are signs of change. Some businesses are making investments in U.S. manufacturing and doing their bit to fight climate change. They also try to improve their supply chain. A few CEOs at select companies are trying to counter the factors that led to America’s extreme income inequalities and to invest in their employees. Target, Walmart, and Chipotle all have recently raised their wages. And at PayPal, the online payments company, CEO Dan Schulman has embarked on an ambitious effort to improve the financial wellbeing of his frontline employees—going well beyond simply raising wages and creating a comprehensive financial wellness program that stands apart in corporate America.

When Schulman took over PayPal, the online payments company, in 2014, he embraced the idealistic language of Silicon Valley, trumpeting a corporate mission statement that suggested technology could solve all the world’s problems.

“Our mission as a company is to try and democratize the management and movement of money,” Schulman said. “It’s a very inclusive statement.”

Schulman assumed that most all of PayPal’s employees were well off. It is worth over $80 billion and Silicon Valley titans are famous for offering generous salaries. But several years ago, Schulman learned that many of PayPal’s lowest-paid employees were having a hard time making ends meet.

The company established a fund of $5 million to assist employees in financial emergencies. The fund received a flood of applications from the moment it was launched. “We found urgent requests for help were increasingly the result of everyday events, like an unexpectedly steep medical bill, a student loan payment, or a car breaking down,” he told me.

The next year, PayPal decided to survey its low-paid and entry-level employees, a group that included many men and women working in call centers, and which accounted for about half the company’s workforce.

Schulman set high goals when he entered the exercise. “I thought the results that would come back were going to be really good, because PayPal is a tech company, and we pay at or above market rates everywhere around the world because we want to attract really great employees,” he said.

This was incorrect. Two-thirds of the respondents stated that they ran out of cash between their paychecks. “We got the survey results back and I was actually shocked to see that our hourly workers—like our call center employees, our entry-level employees—were just like the rest of the market, struggling to make ends meet,” he said.

Over 10,000 workers barely made enough money to live at an extremely profitable technology firm. “What we found out is that employees were making trade-offs, like do I get health care or do I put food on the table?” he said. “That’s ridiculous.”

Schulman was taken aback. “What it told me is that for about half our employees, the market wasn’t working. Capitalism wasn’t working.”

Schulman resolved to do something, but he knew it wouldn’t be enough to just hand out some bonuses and hope for the best. Instead, Schulman sought out data that could tell him if the PayPal interventions were having an impact. He wanted a way to measure “the financial health of our employees” that went beyond basic metrics like the minimum wage, the purchasing power of which varies by zip code.

Over the course of a few months, PayPal worked with academics and nonprofit groups to create a new metric: “net disposable income,” or NDI. That, Schulman explained, amounted to “how much money do you have after you pay all of your taxes and your essential living expenses, like housing and food and that kind of thing.”

PayPal and its partners estimated that an NDI of 20 percent was about what was needed for a family to meet its needs—basics like rent and food, plus things like medical expenses, school supplies, and clothes—and still be able to save. With the new metric in hand, Schulman’s team revisited the survey data. It was a grim result.

Half of PayPal employees have a NDI below 4 percent. This leaves them with a fraction of their pay after they’ve paid for the essentials. Schulman saw a solution. It was the goal to have all PayPal employees achieve at least 20 percent of their NDI. There wasn’t one silver bullet that would easily accomplish that. PayPal came up with a unique program to help its employees, who were often the lowest-paid in their company.

PayPal first raised wages for employees with low NDIs. The company already paid above minimum wage everywhere it had offices, but that clearly wasn’t enough. It increased hourly pay for call center employees.

This gave all employees the opportunity to purchase stock, even those at entry level. It was not an insignificant gesture. It could prove to be an effective way for workers accumulate wealth, given the high value created by the appreciation of stock companies. The program saw PayPal stock increase by two-thirds in just one year.

PayPal launched a complete financial literacy program to its employees. It offers tips and tricks on investing, saving, managing money, as well as other useful information. This was a far superior program than what many large companies offer, however Schulman took a critical additional step.

A surprising result of the financial wellness survey revealed how much employees at PayPal were spending on health care. Every month workers were asked to make a choice between books and medical care or prescriptions. Or gas for their car. The significant portion of the NDI that was spent on health care costing them was going to these costs. So Schulman lowered health care costs for the company’s lowest-paid employees by 60 percent.

It was the most impactful of PayPal’s interventions. “I think if we had just done health care, it would have been a gigantic relief for our employees,” Schulman said. PayPal conducted a survey of its employees several months later after the program had been implemented. The majority of targeted employees now have net disposable incomes of over 20 percent. This is compared to the 16 percent who had the lowest.

In recent years, many other businesses have increased wages. PayPal was an exception. Schulman’s team rewrote their social contract with the lowest-paid employees. This proved that businesses can be both highly profitable and exemplary in taking care of employees.

The financial wellness program at PayPal cost tens of millions of dollars, money that didn’t go out the door in buybacks or dividends. “It was a significant material investment in our employees,” Schulman said. Schulman compared it to other areas of the company, such as infrastructure or advertising. “I believe very strongly that the only sustainable competitive advantage that a company has is the skill set and the passion of their employees,” he said.

Schulman claims that it was well worth the cost. In the months after the program began, customer satisfaction ticked up, employees were more engaged, and PayPal’s stock continued to soar. PayPal recently changed the vesting dates for stock awards so that employees have more opportunities to cash out.

“Over the medium and long term, that investment will pay back to shareholders,” Schulman said. “This whole idea that profit and purpose are at odds with each other is ridiculous. I mean, if you ever have any chance of moving from being a good company to a great company, you have to have the very best employees, that love what they’re doing, that are passionate about what they’re doing. Everything else will emanate from there.”

Adapted from “The Man Who Broke Capitalism: How Jack Welch Gutted the Heartland and Crushed the Soul of Corporate America–and How to Undo His Legacy.”

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