A “trendsetting” move by one of the world’s largest retail chains could set into motion a major shift in the way companies compensate employees, say experts.
Last year, Walmart decided to increase hourly wages for its 1.5 million employees in the United States. It was an effort to combat a drop in profits, as well as poor customer survey results regarding customer service and store cleanliness, according to a New York Times article in October looking at the impact of the higher wages.
With the national minimum wage set at US$7.25, Walmart said employees who completed training would earn no lower than US$10 per hour, while managers’ compensation would jump from US$12 to US$15.
Walmart is said to be investing US$2.7 billion in higher wages, education and training over two years.
More predictable shift scheduling was also levied.
The average hourly pay for a non-managerial Walmart worker in the U.S. is now US$13.69, said the paper. And while customer satisfaction and sales have both increased since the pay raises were implemented, overall profitability remains a question mark.
Cost versus investment
It’s a “trendsetting” move, according to Liz Wright, managing director of Gallagher McDowall Associates, a compensation consulting firm in Toronto.
“Companies are starting to realize that to drive revenue growth on the backs of employees is maybe a short-run issue, as opposed to anything that’s sustainable over the long run. I think that’s an important point that executives need to realize,” she said.
“It’s not always about cost reduction. At Walmart… it practically was their mantra to keep costs low. But driving that to where the employee experience is a negative one can have all kinds of implications over the long term.”
Walmart is using compensation as a strategic solution to drive the business forward, said Wright.
“I really do espouse in the principle that compensation should be viewed as an investment, as opposed to just a cost,” she said. “Ultimately, it’s about trust. You invest in people — whether it’s your customer base or employee base — and you’ll get the returns.”
“Many companies tend to look at compensation in a very narrow way — an HR thing, cost issue. My advice would be to look at it a lot more strategically and understand what compensation investment can do for your business.”
It’s a wonder Walmart was able to last this long without paying employees more, said John Williams, partner at J.C. Williams Group, a retail consulting firm in Toronto, who predicts more retail outlets will follow suit.
“They have to,” he said. “It makes good business sense if you couple it with training. It’s about changing behaviour to have a positive impact on a company and how their customers are treated.”
“Competitively, it’s very smart. There’s a huge battle out there for competent people. Retail is not a career of first choice, so when you’re out there trying to attract people… You have to invest in the right people and make sure that their behaviour meets the standard that you’ve set. Then you will be greatly rewarded with a highly productive store.”
Employee turnover is the “largest hidden cost” in the retail industry, according to Williams, and losing an entry level employee costs a company $3,500, on average. So Walmart’s commitment to employee training and development shouldn’t be overlooked.
“It’s sort of a one-two punch, and I think it’s a great thing they’re doing,” he said.
“When you train someone, it means you’re not going to let them go or fire them.”
The idea of efficiency wages isn’t new, said David Green, professor at the Vancouver School of Economics at the University of British Columbia.
But the fact that Walmart is adopting the strategy is newsworthy since the retail giant is a major player.
“It changes the norm in the market, to some degree,” said Green. “It’s not proven yet, so my guess is other firms are going to hold back and watch. I don’t know that Walmart will prove to be a huge trendsetter, though it may have some spillover effects.”
The idea is that higher wages can actually promote more productivity, he said.
“So, instead of causality running from productivity to wages, it can actually run in the opposite direction as well.”
Opposing business models can co-exist in the same market, said Green.
For instance, Walmart has traditionally lowered its costs by paying low wages, though it also faces the additional costs and headaches caused by high employee turnover and poor customer loyalty.
Wholesale giant Costco, on the other hand, pays higher wages, resulting in employee stability and customer retention, he said.
And Lee Valley Tools is a Canadian business that successfully implements the efficiency wages approach, according to Green.
“There are already employers who really go into it saying: ‘If I pay better and treat my employees better, I get all these benefits.’”
Efficiency wages can be implemented for several reasons, he said. Higher-than-average wages allow employers to enjoy the “pick of the litter,” spur social obligations amongst employees to work harder and be loyal longer, and downgrade the percentage of workers who shirk their duties.
“All of these potentially apply in the Walmart situation,” he said.
The bump in wages could alter everything Walmart was previously about, said Green.
“It means overhauling everything,” he said.
“It means all these middle managers who are used to thinking in terms of getting the cost down by cutting wages… that has to pervade the whole structure. You have to be willing to bear costs and you have to be willing to make it true throughout the institution.”
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