Will Walmart’s Wage Increase Pay Off?

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Walmart’s decision last week to raise its workers’ salaries could be read as either a smart move or inadequate, depending on the company’s larger goals. The company said that beginning in April, it would pay entry-level workers at the company $9 an hour, going up to $10 next February, while it would start salaries for department managers at $13 this summer, and increase that to $15 next year. The move will cost the company $1 billion and benefit half a million U.S. workers, or about two-fifths of its workforce.

Walmart CEO Doug McMillon said in a letter to store employees announcing the wage increase, “When we take a step back, it’s clear to me that one of our highest priorities must be to invest more in our people this year.”

More Is Merrier

If your goal is really to build employee morale, then maybe you handle it differently Twitter ,” said Wharton management professor Adam Cobb. “If you really want to make a big impact, then the dollar amount should have been more,” he noted. “[If] you just go a little bit of the way … you end up spending more money, but it doesn’t work.”

Alternatively, Walmart could have shared a plan with its workers to increase wages over the next few years to levels of $15 or $16 an hour, he explained. “If you start laying out a pathway of wage increases that [employees] are going to get over time, then as a worker, that might give me more confidence,” Cobb said. “I know if I stick with it, I will be rewarded in the future.”

“If your goal is really to build employee morale, then maybe you handle it differently…. [The] dollar amount should have been more.” –Adam Cobb

Cobb explored the likely motivations and impact of Walmart’s wage increase on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

However, if the company wants to maintain operational flexibility and retain some wiggle room on labor costs, the firm’s current wage-increase strategy “probably is a smart move because it gives [the company] options,” especially if Walmart feels uncertainty over its business prospects in the next few years, Cobb noted.

Pre-emptive Move, Good PR

Walmart is also getting ahead of state-mandated wage increases, said Cobb. Many states have already increased their minimum wage to $10, while other states are set to increase the wage to $10 or more at the beginning of next year. U.S. President Barack Obama has often said he wants to raise the federal minimum wage from $7.25 an hour to $10.10, though the Republican Party opposes that.

“[Walmart’s move] is preemptive,” and in that sense “it’s a good thing,” Cobb said. “Why not get some positive PR and goodwill with employees and customers to do what you [will] end up doing anyway?” With the wage increase, Walmart “isn’t trying to extract even more from [its] workers, which is the move they have defaulted to in the past,” he added.

According to Cobb, it is “definitely possible” that the Walmart move could set off a trend of wage increases across the retail industry. He noted that other big retailers, including Gap and IKEA, have also preemptively raised workers’ salaries. Earlier this week, retail chains TJ Maxx and Marshalls said they, too, would increase their U.S. workers’ wages to at least $9 hourly. Even so, Cobb was skeptical. “If I had to make a healthy bet, my guess is that the ripple effect might not be as big as we might like.”

Stiffer Competition

The wage increase could help boost Walmart’s image among its customers, especially at a time when competition from dollar stores and discount wholesale chains like Costco has intensified. Cobb noted that Walmart has been struggling of late in the domestic U.S. market and has faced controversies over shelves being poorly stocked and sagging worker productivity, among other dampeners. Happier workers will help improve customer experiences, he said.

Against that backdrop, Cobb wondered if Walmart is only “experimenting” with the wage increase. “I look at this as them dipping their toe into the pool — a little temperature check,” he said.

“If I had to make a healthy bet, my guess is that the ripple effect might not be as big as we might like.” –Adam Cobb

“The risk of doing the temperature check is that it doesn’t have the effect that they want,” Cobb continued. “Then, the logical scenario is they will retreat, [saying,] ‘Well, we tried this.’ They will be reluctant to continue to increase wages.”

Walmart should avoid that path, Cobb advised. “Actually, continuing to push the wage increase might get them to where they want to be: a happier, healthier workforce that makes the customer experience better and gets people coming back.”

The wage increase could also mean a lot for many Walmart workers, Cobb noted. Estimates are that each worker could earn between $4,500 and $5,000 more annually before taxes. “Every little bit helps,” he said. “It could mean the difference between [being able to pay for] health care and [not being able to do so].” However, he added that he isn’t sure if Walmart is “really moving the needle on people being able to get out of a situation of poverty or get off of some kind of welfare program.”

Saving on Rehiring Costs

Walmart could save a tidy sum in replacing workers if the wage increase leads to higher retention. Cobb noted that Walmart’s worker turnover is 44% and that it spends an estimated $2,500 to replace every worker. By contrast, wholesale club Costco pays its workers upwards of $20 an hour and its worker turnover is in the low teens, he added. “Costco has taken the approach of investing in its workers,” he said. “It trickles down to the customer experience.”

In that light, Walmart’s low-wage strategy may seem short sighted. “The fundamental issue is that we tend to look at labor costs as the wage we pay people and not factor in things like turnover, worker productivity, health and lower absentee rates,” said Cobb. “When you factor those things in, it can lower the firm’s overall cost. But because wage rate is the easiest lever to pull and you can immediately see how it affects the bottom line, that’s the lever that gets reached for.”

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