Bentonville, AR. Study Says Wal-Mart Could Pay Higher Wages
An updated research report from the group Demos says that Wal-Mart could raise the wage of its workers and benefit the company at the same time. They are not mutually exclusive
According to authors Catherine Ruetschlin and Amy Traub, Wal-Mart's focus on short-term results has come at the expense of its front-line service--and is hurting the company. Their report, A Higher Wage Is Possible at Wal-Mart, notes that the retailer's impressive returns in the 1990s and billions of dollars in annual profit have "positioned Wal-Mart investors to expect a commitment to growth and _financial performance from the company." But Wal-Mart's choice to raise short term earnings has "diverted resources away from the kind of human capital investment that would lead to sustainable value creation in the long run." The brief says that investors committed to long-term firm performance would benefit if Wal-Mart moved resources to human capital management (its workforce), which would raise productivity by reducing turnover and improve employee engagement (motivation), which would enhance customer service, and result in better long-term value for the company.
Last year, Demos says, Wal-Mart spent more than $6.6 billion repurchasing shares of its stock, bumping up earnings per share and consolidating ownership among the Walton family heirs. "But the company's performance slumped anyway as weak consumer demand, operational problems as a result of understaffing, and federal cuts to the food stamp program undermined sales." The study says Wal-Mart's own labor mismanagement practices were a central factor in execution failures at US stores._
"Wal-Mart has a unique opportunity to turn things around," Demos continues. "As the world's largest retailer and biggest employer, effective human capital management at Wal-Mart would not only have benefits for the company, but create spillover effects supporting greater economic
stability and growth. Demos calls this Wal-Mart's "under-investment problem."
Wal-Mart spent $6.6 billion in 2013 repurchasing its shares---an expenditure that benefits a small group of owners and executives. "Repurchases help the company meet earnings targets even when sales are down by reducing the number of shares on the market and lifting earnings for those that remain. But when buybacks are poorly timed or crowd out other investment, they can actually undermine longer term goals."
In 2012, Credit Suisse showed that just 36 percent of S&P 500 companies performing share buybacks returned value to shareholders above the basic cost of equity. In Wal-Mart's case, even these massive financial maneuvers are increasingly insufficient to make up for listless company
performance. "Unproductive spending on share repurchases," the authors argue, "is displacing sustainable human capital management that would better align the interests of workers, managers, and shareholders in the company and materialize as greater revenue over time."
According to Wal-Mart's own estimates, the retailer employs 825,000 workers who earn less than $25,000 per year. These inadequate wages that leave many of the company's workers and their families below the official federal poverty line. If Wal-Mart had repurposed its investment in share repurchases into its workforce instead, it could have raised the wage of these 825,000 workers by $5.13 per hour, which would have meant a significant raise in living standards for hundreds of thousands of households and an increase in US sales growth for the company.
Better pay leads to more motivated employees who are better equipped to serve customers, leading to higher sales numbers and better performance overall. According to research conducted by the Wharton School of Business, a company can bring in an average of $10 in new revenue for every additional dollar spent on payroll. Better staffing practices lead to higher sales, since customers can count on stocked shelves and knowledgeable employees. "Investing in front-line services would increase consumer spending at Wal-Mart's own stores and improve company performance," the study concludes.
"Wal-Mart's current pay practices have a negative impact on fundamental performance measures. In the retail market, customers' brand perception is primarily formed by their experience with human capital outcomes. Last year, media reports of Wal-Mart customers abandoning the store for competitors cited underinvestment in front-line services as the central cause, as workers were stretched too thin to accommodate the needs of patrons and keep inventory on the shelves."
Wal-Mart investors have also experienced first-hand how the low-wage economy thwarts performance. In 2013 sales at comparable US stores declined -0.5 percent and revenue growth fell drastically to 1.6 percent, down from 5 percent the year before. The company pointed to benefit cuts in the federal Supplemental Nutrition Assistance Plan (SNAP, or food stamps) in November and January as one factor in their falling profits. "Millions of dollars in subsidies support the firm's labor costs and enable Wal-Mart to pay wages below the level necessary for workers and their families to survive. Dependence on public subsidies to finance the wage bill transfers the cost of maintaining a labor force onto taxpayers and externalizes the consequences of human capital management at the firm."
Wal-Mart depends on a customer base that spends more than $13 billion in SNAP benefits at the store each year. When customers--a population that includes Wal-Mart's own workers--cut back on basic purchases, those cuts appear in the financial performance of the company. Food stamps are a form of corporate welfare transfer from U.S taxpayers to Wal-Mart.
What you can do: The consulting group Institutional Shareholders Services (ISS) recently criticized Wal-Mart for inadequate oversight of human capital management among the company's Board of Directors. According to ISS, the Walton family heirs' ownership control and the lack of an independent board has led to troubling executive pay practices and inadequate transparency surrounding shareholders' legal risks.
The Waltons are majority owners of the company, holding more than 50 percent of the company's public shares and collecting dividend payments of more than $3 billion in total--a raise over their 2012 dividend earnings by more than $400 million. "Yet while the Waltons already control more wealth than 40 percent of Americans combined, the workers who contribute to generating this wealth every day must often choose between buying food or keeping the electricity on. The divergent fortunes of these two sides of the Wal-Mart family are a prime example of the way business decisions at the company fuel inequality and undermine broad economic stability and growth."
Just the $3 billion spent in dividend payments to the
Wal-Mart heirs would amount to a raise of $2.38 per hour for Walmart's 825,000 low-wage workers.
Readers wishing to see the full Demos study can find it at: http://www.demos.org/publication/higher-wage-possible-walmart-2014-update