For lots of reasons Henry Ford has been written off as a not-too-bright, mean-spirited guy whose only claim to greatness is the assembly line, and even that is quite often trashed as demeaning to workers and the heart of an out-dated ‘mass production’ concept. Make no mistake, Ford gave his critics plenty of ammunition, but the simple fact remains: Taichi Ohno, one of the core architects of the Toyota Production System, wrote:
“We see that automation and the work-flow system invented and developed by Ford and his collaborators was never intended to cause workers to work harder and harder, to feel driven by their machines and alienated from their work … Ford’s successors, however, did not make production flow as Ford intended.”
And he wrote: “I, for one, am in awe of Ford’s greatness. I think that if the American king of cars were still alive, he would be headed in the same direction as Toyota.”
Ninety eight years ago today, on January 5, 1914, Ford announced the $5 day. Four days prior to that, on New Years Day, Ford met with his key reports and they played with numbers. Wages in the plant ranged from 26 to 54 cents per hour, or an average of about $3.10 a day. The $5 per day rate that came out of that meeting and was approved by the directors on January 5 was not a flat rate, but the new average, with almost all employees receiving proportionate increases. The $5 average was about twice the average rate for manufacturing work in Detroit at the time.
Why Ford did it is complicated, but one thing is certain – it was not done to combat high employee turnover resulting from the grueling nature of assembly line work. That is a latter day myth and pure hogwash. the company had implemented sweeping reforms in just about every aspect of employee relations and the pay system earlier in 1913 – including an across-the-board 13% pay increase just three months before the $5 day announcement,and employee turnover had dropped from around 48% to about 6%. There was no turnover problem to address, especially one that would justify doubling the payroll.
The impetus seems to have come from four sources. First is the little known but hugely significant experience of Ford’s assembly plant director in Manchester, England, Percival Perry. He had recently doubled the wages of his employees to a rate he calculated as a basic ‘living wage’ – a rate at which people could live a decent life, rather than the least wage possible. Perry realized a substantial improvement in production and quality as a result.
Second, John Lee, Ford’s first real HR manager was urging him to do the same thing based on the conviction that if people did not have to worry about financial pressures at home they would be much more productive.
Third, Ford’s wife Clara read all of the mail Henry received from employees and, more important, from many of their wives. She put a great deal of pressure on Ford to make the work he was doing more meaningful and to be more driven by “social justice”.
Finally, there was Ford himself. In 1913 the company had paid $11.2 million in dividends out of an after-tax profit of $27 million. The suppliers were enormously profitable. Car prices had been reduced for the 5th year in a row and a Model T could be had for $500. All of the stakeholders were benefiting, except the employees. That seemed to be the straw that broke the camel’s back in his thinking and the $5 day was hatched.
After the near doubling of pay, total Ford payroll costs – not just direct labor – were 11% of sales in 1914. The $5 day clearly meant a lot more to the employees who received it than it did to the company that paid it. Profits in 1914 went up to $33 million, dividends increased to $12.2 million, and the price of the car dropped again – to $440.
It seems fitting to give the thinking behind the $5 day some serious thought, to consider the results, and to see how our thinking stacks up against Ford’s. There is a reason Ohno and Toyota were so impressed by Ford. Given their track records, the snubs of Ford on the part of ‘serious’ business professionals on Wall Street and the great minds of academia should be taken as all the more reason to take him and the $5 day seriously.