Higher sales, happier staff after Walmart pays staff more

Bentonville, Arkansas

A COUPLE of years ago, Walmart, which once built its entire branding around a big yellow smiley face, was creating more than its share of frowns.

Shoppers were fed up. They complained of dirty bathrooms, empty shelves, endless checkout lines and impossible-to-find employees. Only 16 per cent of stores were meeting the group's customer service goals. The dissatisfaction showed up where it counts. Sales at stores open at least a year fell for five straight quarters; the company's revenue fell for the first time in Walmart's 45-year run as a public company in 2015 (currency fluctuations were a big factor, too).

To fix it, executives came up with what, for Walmart, counted as a revolutionary idea. This is, after all, a company famous for squeezing pennies so successfully that labour groups accuse it of depressing wages across the US economy. As an efficient, multinational selling machine, it had a reputation for treating staff pay as a cost to be minimised.

But in early 2015, Walmart announced it would pay its workers more. There is sound economic theory behind the idea. "Efficiency wages" is the term economists use for the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.

Executives in early 2015 sketched out a plan to spend more money on increased wages and training, and offer more predictable scheduling. They refer to this plan as "the investments". The results are promising. By early 2016, the proportion of stores hitting their targeted customer-service ratings had rebounded to 75 per cent. Sales are rising again.

But the immediate impact on earnings and the company's stock price have been less rosy. The question for Walmart is ultimately whether the short-run hit from these make it a stronger competitor in the long run. Will the investments turn out to be the beginning of a change in how Walmart and other giant companies think about their workers, or just a one-off experiment to be reversed when the next recession rolls around?

On the morning of Feb 19, 2015, Walmart's 1.2 million employees across the US gathered to watch a video feed by their chief executive. Doug McMillon more or less acknowledged that Walmart had made a mistake. It had gone too far in trying to cut payroll costs to the bone.

What most store employees probably didn't know was that Mr McMillon and his executive team, who had been promoted into their jobs a year earlier, were under great pressure from investors. They needed to reverse a slide in business and fight off threats in all directions - dollar discounters on the low end, Amazon online, direct competitors such as Target and countless rivals. People were shopping more - at Walmart's rivals.

The company had been busy raising profits by cutting labour costs. The number of employees in the US fell by 7 per cent from early 2008 to early 2013, for example, a span in which the square footage of stores rose 13 per cent. Some of that reflects technological advances, like self- checkout kiosks. But when Mr McMillon and a new team came in to reverse the slide starting in early 2014, they diagnosed the problem as having taken the cost-cutting logic too far.

From store managers nationwide, they heard that years of cost-cutting meant Walmart had become viewed as a last-ditch option for employment - not the place that ambitious people might want to work. They were under such pressure to keep labour costs low that the employees they hired showed little loyalty or career-building devotion to their jobs.

"We realised quickly that wages are only one part of it, that what also matters are the schedules we give people, the hours that they work, the training we give them, the opportunities you provide them," said Judith McKenna, who became chief operating officer in late 2014, in a recent interview. "What you've got to do is not just fix one part, but get all of these things moving together." That is how Walmart decided to build 200 training centres to offer a clearer path for hourly employees who want to get on the higher-paying management track. And it said it would raise its hourly pay to a minimum of US$10 for workers who complete a training course and raise department manager pay to US$15 an hour, from US$12. It said it would offer more flexible and predictable schedules to hourly workers.

The news from Bentonville made headlines worldwide. The federal minimum wage had been US$7.25 since 2009, and the labour market had awarded meager pay gains for people at the lower end of the spectrum for decades - facts that helped increase Walmart's bottom line. Now, the US' largest private employer was signalling it was about to gingerly try a different approach - and put US$2.7 billion where its mouth was. Walmart says its average pay for a full-time non-managerial employee is now US$13.69 an hour, up 16 per cent since early 2014. In the same span, consumer prices have risen 2.1 per cent.

It's not that the retail industry doesn't offer potential paths to good incomes. Starting pay for an assistant store manager at Walmart is US$48,500, and the manager of one of its large stores can make comfortably above US$100,000.

The problem - described by Walmart managers and people outside the company who study labour markets - is that there is no clear path for an entry-level worker to get there. Much training is impromptu, and chains have tended to view their hourly workers as interchangeable cogs rather than resources worth investing in.

But while Walmart's changes aren't as extensive as advocates would prefer, the company has shifted, in relative terms, up the industry's pay scale. In early 2014, Walmart's self-reported average full-time pay was 3.7 per cent higher than the average hourly earnings for non-managerial workers at general merchandise stores calculated by the Labor Department. Now, it is 13.7 per cent higher.

In the short term, the Walmart experiment shows pretty clearly that paying people better improves both the workforce and the shoppers' experience, but not profitability, at least not yet.

Still, here is one other nugget the company has found. The extra wages it is paying its workers don't all go out the door on payday, executives said. Spending at the stores by employees has risen - offering a possible metaphor for what those efficiency-wage economists argue might happen across the economy, if wages were to climb. NYTIMES