In January 2015, insurance giant Aetna announced their plans to increase the base wage of their lowest paid employees to at least $16 per hour, more than double the federal minimum wage at that time. That increase affected 12 percent of Aetna’s 48,000 employees and had a significant impact on both the employees and the company. The lowest paid employees, who had a base rate of $12 per hour, saw a 33 percent increase in pay, with the average increase of those affected being 11 percent. In addition, the company extended health insurance benefits to nearly 7,000 employees, thus lowering those employees’ annual out-of-pocket costs by up to $4,000.

While the employees are, no doubt, delighted, this increase in compensation and benefits comes with a hefty price tag. The total cost of the wage and benefit enhancements was estimated at $14 million in 2015 and more than $25 million in 2016. However, Aetna’s operating profit in 2014 was $2.04 billion and for 2015, $2.4 billion, an increase of over 17 percent. Therefore, the fully implemented cost of these changes was only about 1 percent of profit. In addition, the company estimated that employee turnover costs them about $120 million a year. Research has shown that low-wage workers are more likely to quit than their higher paid counterparts. The costs associated with recruiting, hiring, and training new employees are substantial, so a high turnover rate comes with significant hidden costs.

CEO Mark Bertolini is convinced that the pay raise increases productivity. Many of the lowest paid workers are employed in the company’s call centers, an extremely stressful environment. Callers are often upset by the events that led to their claim, such as damage to their home or car, or an illness or injury, and may also have questions or disputes about coverage. According to Kally Dunn, a call center supervisor from Fresno, “When they call, … they’re angry. And so it’s just a lot of de-escalating, calming them down, … reassuring them.” On top of the stress of their job, these low-wage workers face the challenges of paying their day-to-day expenses. One of the affected employees from the Fresno call center is Fabian Arredondo. He says, “Finance can be one of the main stresses in people’s lives. And when you can pull some relief away from that stress, I definitely think it makes for—you know, a happy employee is a productive employee.”

This is exactly the logic that led Aetna to make this bold move. Bertolini was surprised to find that many of his employees were on public assistance, such as food stamps and Medicaid. He was shocked “that we as a thriving organization, as a success company, a Fortune 100 company, should have people that were living like that among the ranks of our employees.” Aetna was careful to ensure that the raises that they awarded employees were enough to offset any loss of public assistance benefits, so that they truly ended up in a better financial position after the change.

Bertolini also believes that Aetna’s shareholders, the owners of the company, are supportive of the change. “We positioned it with them on the economics first, but went to this very notion of ‘this isn’t fair.’ We need to invest in our employees. We need to help restore the middle class, and that should be good for the economy as a whole. And so for us it is as much—probably, for me personally, more—a moral argument than it is a financial one.”

Economists Justin Wolfers and Jan Zilinsky recently released a study of the impact of this type of pay increase in private-sector businesses in the United States. Wolfers and Zilinsky found research to support the conclusion that higher wages can improve worker productivity and performance. They cited one study that showed that more than half of the cost of a pay increase can be offset by increases in productivity and decreases in turnover-related costs. In addition, by offering higher wages, companies are able to recruit and hire better employees and decrease disciplinary issues. Famous economists such as Janet Yellen (current Chair of the Board of Governors of the Federal Reserve System), as far back as 1984, asserted that higher wages create the groundwork for employee productivity as a result of “reduced shirking by employees due to a higher cost of job loss; lower turnover; an improvement in the average quality of job applicants and improved morale.” The benefits of higher wages also extend to quality and customer service. A number of recent studies found that employers reported improvements in both customer service and the quality of production. There are thousands of variables affecting a company’s financial results, but for Aetna, indications are in line with the studies. Even though general and administrative costs increased over 2015 and 2016, revenues increased by a wider margin, increasing operating income by $500 million per year.

However, Bertolini also knows that corporate culture is perhaps an even more important factor in keeping employees and in helping them become more productive. Corporate culture goes beyond the formal mission, vision, and values statements. It’s the informal way that people interact. It is implied, rather than expressly defined, and it often grows organically out of the individual behaviors of all of the members of the organization. Leaders can underestimate its power; in fact, many people say that culture trumps mission. It’s no wonder then that companies that are concentrating on culture are seeing the biggest payoffs because they are putting their employees first. (After studying the content of this chapter, you should be able to answer the set of discussion questions found at the end of the chapter.)