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Value of Employee Benefits in Eye of Beholder

Earlier this week I wrote about how advocates of “social responsibility” and environmental, social, and governance (ESG) standards for companies have little interest in their proposed requirements being voluntary, despite frequent protestations to the contrary. Corporate managers happily sign on to ostensibly voluntary statements, which they see as harmless and cost-free publicity, but which are then used by activists as proof that the goals referenced in them are so important (and uncontroversial among business leaders) that there is no reason not to make them legally binding.

It’s become a rhetorical cliché to refer to government regulations on business as representing an inflexible “one size fits all” approach, but the criticism is valid. No single set of requirements for business conduct will ever cover every industry, company, and outcome fairly, which is why our laws focus on stopping clear cases of force and fraud and leave questions of virtuous voluntary conduct to the eye of the beholder. Specific strategies for managing employees or contracts with suppliers are too dependent on a kaleidoscope of shifting relationships and changing players to be dictated by any single document written by a committee of self-declared experts. 

Take the case of Karen Wright, CEO of Ariel Corporation, a leading manufacturer of natural gas compressors. In the interview with Competitive Enterprise Institute President Kent Lassman that we recently published, she recounted some of the ways she strives to keep her employees productive and on the payroll, even when demand declines in what is an extremely cyclical business. Wright described her company’s off-cycle training program:

[W]e recognized that blue collar workers can increase their skill set, go to school and work at the same time. Actually, part of what motivated me is I noticed that a lot of the guys that are in the hourly workforce feel kind of like they’re not as a good because they don’t have a college degree. So, we partnered with several Ohio technical colleges, and developed two-year degree programs so that when we do have a downturn, we continue to pay our guys for 40 hours a week and they may be in school for 20 of that and working for 20, because of low production requirements. They are getting paid and getting a college degree!

This works well for Ariel, and the success of the many employees who now have additional career skills and credentials speaks for itself. But such a resource-intensive program would not make sense for every company. Ariel’s workforce of machinist and mechanics have highly specific skill sets that are difficult to replace, especially given that the company is located in a small town rather than a large urban area. The bench of people with the relevant skills in Mount Vernon, Ohio, who don’t already work for the company (or are retired from it) is thin. A restaurant or retail operator, on the other hand, might have a very different set of needs and strategies.

The necessary logic of ESG advocates, however, calls for policies to be universal. Rather than acknowledging that all employee retention strategies work for some companies and not as well for others, we’re told that certain employee benefits should be treated like human rights. If a company doesn’t provide their employees with specific services X, Y, and Z, then they are a categorically bad employer and should be shamed or regulated into changing their behavior.

There is a finite amount of wages and benefits that any company can dedicate to gratifying employee expectations. When activists succeed in making an additional specific benefit mandatory, they’re usually squeezing out something else that a company was already doing that is still optional. My colleague Ryan Young addressed this phenomenon in his October 2019 study, “Minimum Wages Have Tradeoffs: Unintended Consequences of the Fight for 15,” which looked at the effects of increasing the minimum wage:

Total worker compensation includes more than just wages. Many workers also earn significant non-wage income in the forms of insurance, employee discounts, complimentary food and parking, training, tuition assistance, and more. Cuts to non-wage compensation are a common tradeoff of higher wages, though they potentially leave total compensation unchanged, depending on the mix of tradeoffs in a given case.

Thus, a mandatory requirement to add benefit B to the compensation package of a firm’s employees may well result in the cancellation of existing benefit A, which employees liked better. But since it’s now illegal to do business without implementing B, the employees’ preferences are irrelevant and have been superseded. Everyone involved is worse off on net, but the people who lobbied for the change are too busy giving each other “Hero of the Worker” medals to notice.

For more on how such seemingly beneficial corporate policies can fizzle and even backfire, see my review of Professor James O’Toole’s fascinating book The Enlightened Capitalists: Cautionary Tales of Business Pioneers Who Tried to Do Well by Doing Good, in which I noted that “employee welfare outcomes are often counterintuitive [and] well-intentioned policies can create dynamic effects within the company that reduce or eliminate expected gains, either for the company or for individual employees.”