Behind the hype over Aetna’s minimum wage boost

January 20, 2015, 6:31 PM UTC
The Davos World Economic Forum 2014
Mark Bertolini, chief executive officer of Aetna Inc., poses for a photograph following a Bloomberg Television interview on the opening day of the World Economic Forum (WEF) in Davos, Switzerland, on Wednesday, Jan. 22, 2014. World leaders, influential executives, bankers and policy makers attend the 44th annual meeting of the World Economic Forum in Davos, the five day event runs from Jan. 22-25. Photographer: Simon Dawson/Bloomberg via Getty Images
Photograph by Simon Dawson — Bloomberg via Getty Images

Last week, Aetna, Inc., one of the largest healthcare insurers in America, made news when it announced it would boost its minimum wage base to $16 an hour for its lowest-earning employees. Aetna (AET) also pledged to cover more of its employee’s health costs. In a Wall Street Journal interview, CEO Mark Bertolini said the company hopes to reduce its $120 million annual turnover costs and will monitor how this investment plays out.

While a firm’s decision to increase pay for lower-wage workers should certainly be applauded, it also begs the question: Why is the decision to pay workers $16 per hour breaking news?

My answer: because of the message it sends to investors and shareholders.

Business leaders are undoubtedly influenced by their investors and shareholders. Aetna made the business case for investing in their employees by committing to reduced turnover costs. Unfortunately, for some investors, a firm’s employees are viewed as liabilities instead of assets.

This became clear when I spoke to Kevin Davis, co-founder of Rebound Technology, a Boulder-based start-up that is a part of a Hitachi Foundation initiative that supports entrepreneurs and helps connect them with investment capital. Kevin wants to build his refrigeration business with employees in mind, offering them market-rate wages and benefits. However, when Kevin meets with investors, he tells me he is hesitant to mention his vision for good jobs. He’s concerned this might scare off potential investors.

I understand his hesitation. Investors generally look for lean operations with low overhead and expenses. Lean often means paying employees below-market wages, not offering annual raises or benefits, and long work hours in exchange for some equity. This is usually not a good deal for employees unless the start-up becomes wildly successful.

People drive effective operations and businesses need to invest in workers with a focus on the bottom line. For start-ups, that means they need to take time to define their long-term vision for the company and how employees, and their associated skills, will contribute to that vision. Businesses then need to track and measure productivity gains and turnover costs when they conduct a cost-benefit analysis of the investment they made in their employees.

Despite a solid body of research and an array of business success stories, the notion still persists that an investment in people is an excess expense. There are funds, such as the Parnassus Endeavor Fund, that find companies out-perform competitors because of the investments they make in their workforce. Moreover, there are impact investors who want their money to achieve social and environmental returns in addition to economic returns, but they are outliers.

Business leaders should seek investors who align with their goals. Businesses need capital at every stage – from start-up through their decades of growth. There is a dating game between fund seekers and investors – and both should guard against a poor fit.

Aetna’s CEO Mark Bertolini took a bold stand by raising the wage floor to $16 an hour. Roughly 12 percent of the company’s U.S. workforce will directly benefit. In making this change, Bertolini made a larger point: these are the people that Aetna counts on to serve its customers. It is his belief that reducing turnover and improving the quality of customer engagement will yield significant returns on the estimated $14 million that these changes are expected to cost Aetna in 2015.

As a leader in the insurance industry, Aetna is deservedly making news. I can’t help but hope for the day when this is viewed not as breaking news, but as just plain good business.

Barbara Dyer is president & CEO of The Hitachi Foundation and senior lecturer at the MIT Sloan School of Management.

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