Thinking On: The Owner-Labor Tug of War

American Airlines’ Big Announcement

When American Airlines announced its intention to raise wages to match rates offered by rival airlines, some members of Wall Street groaned. “This is frustrating. Labor is being paid first again. Shareholders get leftovers,” Citi analyst Kevin Crissey wrote to clients in a comment that ricocheted around the internet and prompted pushback from proponents of the move.

CEO Doug Parker was expecting the blow to AA’s stock price, and moved forward anyway, telling investors that achieving their goal of building the best airline in the world required “an engaged and enthusiastic team.” He explained, “As a service organization, investments in our team are investments in our product.”

Parker’s comment suggests that better pay for his workers will eventually mean more profits going to shareholders. As investors, we think that’s an interesting thesis, and one worth testing. How do wages fit into the larger context of how a company adds value—not only for employees and shareholders, but also for managers, customers, suppliers, neighboring communities, and even the local landscape?

Testing the Thesis with Circuit City

As we looked for ways to test the thesis, we were reminded of the circumstances that led to Circuit City declaring bankruptcy in 2008. The company had thrived in the 1980s and ‘90s, when they were known for having factory-trained workers and their slogan promised service that was “state of the art.” One commercial bragged, “At Circuit City we’ve got higher customer satisfaction ratings than any other specialty home electronics and appliance chain.”

By 2008, the company was in bankruptcy, and Circuit City closed their doors in 2009. Commentators point to a number of poor business decisions leading to that moment, but often the heavyweight is the dramatic decline in customer service in 2007, when the company decided to end their commission-based sales and lay off their highest-paid sales people, replacing them with cheaper, hourly workers. In 2012, the founder’s son wrote in HBR how his father had been inspired by the employee-empowering management theories of MIT professor Douglas MacGregor, but that abandoning them was a key aspect of the company’s downfall.

So with these factors in mind, how do we look at Circuit City’s net contribution to the world over the course of their last year or two in business, and especially around the time they went out of business? How do we think about the lessons it can teach us about the validity (or lack thereof) of Parkers’ claim about American Airlines?

Let’s start with a baseline: Circuit City’s heyday, when employees were paid decently, well-trained and working in a culture driven by founder Sam Wurtzel’s belief in employee empowerment. Fast forward to late 2007, employees begin to struggle with wage decreases and layoffs. The most successful (and therefore highest earning) employees had the option of being fired or dealing with ten weeks of unemployment before coming back to lower, fixed wages. The lost employees were replaced at much lower wages with people who knew less about consumer electronics—resulting not only in disappointing earnings for those incoming workers, but also frustration for customers. The store managers had to oversee all of this chaotic firing, hiring, training, and onboarding.

By the time this led Circuit City to its bankruptcy and closure, stakeholders across the board were feeling the negative impacts: The remaining employees lost their jobs. Customers lost a source of competition and purchasing options. Suppliers that had extended credit to Circuit City got less than 14 cents on each dollar owed and neighborhoods faced the blight of big box stores sitting empty—many for years, according to one commentator. And of course, managers lost their jobs, and shareholders their investment.

In other words, it took less than three years for the negative impacts of the treating their workers poorly to boomerang around to virtually all of Circuit City’s stakeholders.

Outcomes for American Airlines: Still Up In The Air?

It would be tempting to make an apples-to-apples comparison between American Airlines and Circuit City, as in both cases, the service experience is a fairly important part of the overall purchase.

However, there are important differences. Air passengers have little expectation of an air travel experience that could genuinely be pleasant, and often are simply hoping to get to their destination without major hassles or a huge ticket price. Customer loyalty might not come with just a few positive experiences.

But with a company as large as American Airlines (employing more than a hundred thousand people), the combined effect of engaged and enthusiastic employees could add up to something big over time: waste-saving ideas, positive customer experiences, happier communities, and, if the thesis plays out, a competitive share price.

We would welcome your thoughts in the comments section. Will the change in American Airlines wages have an impact on any of its other stakeholders? Are there stakeholders that we’re failing to consider? Will the market reward or penalize the activity over the short-term? What about the long-term? Help us see the whole picture.

Click here to read more reflections from Heron on aspects of our work and the many reasons we do it.