When Treating Employees Well Doesn’t Pay Off

Published: Jun 07, 2017

 CSR       Finance       Salary & Benefits       Technology       
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Today, the three most well known ride-hailing companies here in New York City are Uber, Lyft, and Juno. Uber is the world’s largest and most controversial ride-hailing company, and its latest scandalous news involves the firing of 20 employees for harassment, discrimination, and plain old inappropriate behavior. Whether this is a good sign (Uber cleaning up its act) or a bad sign (of how bad the bad Uber behavior really is) remains to be seen (57 additional cases of discrimation and harassment are still under review, plus there's this disturbing news about another Uber firing).

As for Lyft, the solid No. 2 in the ride-hailing market in NYC, L.A., and San Francisco, the firm received a nice bump a few months back when 200,000 Uber subscribers ditched their Uber apps in the wake of an insensitive Uber tweet after Donald Trump’s first of two failed executive orders on immigration. However, after that bump (Lyft was the most popular downloaded app for a minute), the company hasn’t been able to gain much more ground and so remains a distant but solid No. 2 in the market. On the plus side, unlike its main competitor, Lyft has managed to stay out of scandalous headlines in recent years.

And as for Juno, when it went into business at the end of 2015, it brought a different model to the ride-hailing game: a model that promised to treat its drivers well, paying them more than Uber or Lyft paid their drivers, while at the same time offering lower fares to riders. Juno kept to its word and, as a result, was gaining ground with customers, which rewarded the company for treating its drivers well and keeping down fares. However, the investing community—the “finance guys”—didn’t much like this model of giving money to employees at the expense of investors. And so, Juno’s socially responsible model crashed and burned. In April, Juno was forced to sell itself to Israeli ride-hailing company Gett, which will be ending the model of paying drivers more.

Perhaps even more disheartening than Juno’s demise is the fact that ride-hailing is far from the only industry being affected by the shunning of social responsibility.

In this philosophical tension, the investors-above-all doctrine seems to have triumphed over the more inclusive approach. “I think what’s recent is maybe being so completely blatant about it,” Peter Cappelli, a professor and labor economist at Wharton, said. When American Airlines agreed to give raises to its pilots and flight attendants in April, analysts at a handful of investment banks reacted bitterly. “This is frustrating,” a Citigroup analyst named Kevin Crissey wrote in a note that was sent to the bank’s clients. “Labor is being paid first again. Shareholders get leftovers.” Jamie Baker, of JPMorgan, also chimed in: “We are troubled by AAL’s wealth transfer of nearly $1 billion to its labor groups.”
Newer platform companies have also encountered the phenomenon. An app called Maple, which made the nearly unheard-of decision to offer health benefits and employee status to its food-delivery people, folded in recent months. Etsy, which allows craftspeople to sell their goods online, and which became known for its employee perks, has lost most of its stock-market value since it went public, in 2015; hedge-fund investors have been pushing the company to reduce its costs and to lay off employees. In the case of Juno, according to a person familiar with its operations, the founders sold the company and agreed to cut its driver stock awards because they couldn’t find new investors to finance its growth. “They were stuck from an expansion perspective, and this was what had to give,” I was told. “It came with some huge compromises.”

It’s important to note that Juno didn’t die soley due to its positive treatment of its drivers; there were other factors involved (perhaps not the least of which was the relentless competitiveness of Uber and Lyft). And there were tech industry observers that predicted Juno’s demise if the firm kept its costs high.

However, when shareholders’ and investors’ immediate interest is the determining factor with respect to a company’s longevity, employees and customers will ultimately lose. Employees will be taken advantage of, earning less than fair wages while becoming disgruntled and thus not working to the best of their ability. Meanwhile, customers will be delivered a substandard product due to those disgruntled workers working less hard. Perhaps the only people who will win (in the short term) are these guys:

Many factors contributed to the troubles of these companies, but Cappelli notes how “vociferously the investment community seems to object to being nice to employees. It’s a reminder that, in the corporate world, things are constantly yielding to the finance guys—whether they know what they’re doing or not.”

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