Henry Ford, Meet Brad Smith
March 30, 2015
On Jan. 5, 1914, Henry Ford announced something for which he is still widely known: a revolution in the pay practices of his Ford Motor Company. He unveiled an incentive system whereby thousands of production-line workers would, if certain personal and corporate goals were met, receive in addition to their current hourly wage a bonus that would boost their total pay to a princely $5 per day.
Mr. Ford was aiming to pay sufficiently high wages to induce higher worker productivity—that is, in the jargon of economics, to pay “efficiency wages.” In 1913 mechanization of Ford’s automobile production lines had sapped the morale of many of his craft workers, to the point that employee turnover spiked to a reported 370 percent. Workers facing big potential bonuses had a big new incentive to accept, not undercut, the new production methods—and thus allow the company to realize the full cost savings and output boosts of mechanization.
Mr. Ford was also aiming to address some of his broader social concerns. Worried about the habits and morals of workers, with his new pay plan Mr. Ford also established in Ford a Sociological Department tasked with monitoring workers’ personal lives. Supervisors in this department interviewed workers in their homes to verify their eligibility for their full bonuses by meeting several criteria: “To qualify for the pay increase, workers had to abstain from alcohol, not physically abuse their families, not take in boarders, keep their homes clean, and contribute regularly to a savings account.”
Thus did Henry Ford enter the arc of American history as a business leader who reshaped the trajectory of employer-employee relations. His revolutionary methods had a clear business motive. After Ford profits doubled between 1914 and 1916 he reflected, “The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made.” But his impact was far broader. He was celebrated by many workers for boosting their standard of living, and many other U.S. companies followed his lead with similar pay-boosting plans.
A century later much is different in the global economy—yet much is the same, too. As we (and many others) have written, today too many workers face too much anxiety about fading economic opportunity amidst sluggish job growth and stagnant wages. Last week Brad Smith, General Counsel and Executive Vice President of Microsoft, made an announcement in that same spirit of good business also being good for workers.
Starting this year, any Microsoft supplier with at least 50 employees in the United States will need to offer all its U.S. Microsoft-linked employees (i.e., all its U.S. employees who work at least 1,500 hours for this supplier and “who perform substantial work for Microsoft”) at least 15 days of paid leave each year. Microsoft itself already offers generous paid leave to its own employees, including annual leave, sick leave, and time off for new parents. This new policy will extend paid-leave benefits to Microsoft suppliers.
One interesting difference between Ford and Microsoft’s plans is Ford changed pay practices inside his company whereas Microsoft aims to change them outside its company. This may at least partly reflect how differently leading global companies self-organized then versus now. In the early 20th century companies often owned and operated many disparate stages of production. Indeed, Ford’s famous Rouge River complex produced not just automobiles but electricity, steel, glass, paper, and even soybeans (for plastic parts). At its peak, Rouge River employed over 100,000 people and operated its own police force, fire brigade, and hospital.
Microsoft has no Rouge River. As of June 30, 2014 Microsoft employed about 128,000 worldwide. Its global production network, however, involves thousands of suppliers with whom it has long partnered on many key activities—Mr. Smith cited “from building maintenance to management consulting and campus security to software localization.” The total number of jobs linked to Microsoft extends well beyond employees of the company itself. One recent study of Microsoft wages and jobs used input-output tables to calculate that each Microsoft job in America supports an additional 8.5 jobs elsewhere in the United States. To its credit, Microsoft acknowledges that it may ultimately share in the costs of its new paid-leave plan. Mr. Smith commented that, “because we recognize that this approach may increase the costs for some of our suppliers, our plan is to work with them to implement these changes over the next 12 months. We appreciate that this may ultimately result in increased costs for Microsoft.”
Despite these interesting differences, Microsoft’s plan shares with Mr. Ford’s the common goal of helping the company and workers alike in the spirit of efficiency wages: “paid time off benefits both employers and employees by contributing to a happier and more productive workforce. Research shows paid time off contributes to the health and well-being of workers and their families, strengthens family ties, increases productivity, improves retention, and lowers health-care costs.”
And like Mr. Ford, Mr. Smith and Microsoft are aiming to address broader social concerns—here, concerns about income distribution and growth (albeit not with an intrusive Sociological Department). Mr. Smith reflected that the ongoing “debate about income inequality and the challenges facing working people and families … led us to step back and think anew.” Paid leave is currently a benefit enjoyed disproportionately by higher-income workers. “As one study found, only 49 percent of those in the bottom fourth of earners get paid time off, compared with almost 90 percent among the top quarter of earners.”
As we have written earlier, part of what will help struggling families are business leaders who craft high-performance organizations whose gains are enjoyed by their workers as well as other stakeholders. Last week, in our opinion, Microsoft leaders took a step in the right direction.
Articles © 2015 Matthew Slaughter and Matthew Rees. All rights reserved.
Publication © 2015 Trustees of Dartmouth College. All rights reserved.