Dear Poor People: This is Wal-Mart’s World, You’re Just Living in It


Source: The Motley Fool

Henry Ford knew a self-serving opportunity when he saw one. In 1914, he announced that Ford Motor Company would pay its workers $5 a day or nearly double the average autoworker's wage at the time. Ford reasoned that by doing so more of them could afford to buy his cars.

Fast forward to today, and Wal-Mart (NYSE: WMT  ) appears to be taking a page out of the same playbook. Though there's one important distinction. If Wal-Mart were to enrich its employees, it may very well lose them as customers. As a result, Wal-Mart is doing precisely the opposite, paying its employees so little that they have no choice but to rely on its everyday low prices.

Unless you're an executive at Wal-Mart or work in its corporate human resources department, it's impossible to come up with a precise estimate for how much it pays -- or, for that matter, doesn't pay -- an average sales associate. The company pegs the figure at $12.75 an hour. Others say it's below $9 an hour once managers are excluded and part-time employees are included.

Bill Simon, the chief executive officer of Wal-Mart's domestic operations, touched on the issue earlier this year at a conference sponsored by Goldman Sachs. According to his presentation, over 475,000 of its associates earned more than $25,000 last year. While that's not a lot, it's enough to scrape by -- if you shop only at Wal-Mart, that is. More disturbing, however, was the implication that its other 825,000 employees in the United States made less.

The revelation caused significant uproar in the media and among the retail giant's own employees, ultimately fueling calls for an increase in the federal minimum wage.

I'll be the first to admit that statistics like these make it hard not to pick up a pitchfork and join the protest. This is particularly true when you consider how much Wal-Mart's top executives get paid. For the 2013 fiscal year, outgoing CEO Mike Duke earned a staggering $27.8 million after all components of his compensation are taken into consideration. That equates to the annual earnings of roughly 1,100 Wal-Mart employees combined (using the $25,000 figure cited above).

What's lost in the mix, however, is that an increase in their wages won't materialize out of thin air. How corporate profits are divvied up between reinvestment, bondholders, shareholders, employees, and customers is a zero-sum game. For one group to get more, another must get less. That being said, I did come across one analysis by a senior editor at Fortune which appears to assume that Wal-Mart has money trees planted behind its headquarters in Bentonville, Arkansas.

So, who should give it up? Should Wal-Mart raise prices and thereby violate the very thing that made it successful in the first place? Should it reinvest less of its free cash flow in the business through capital expenditures? Or should it reduce the amount it pays out to shareholders via dividends and share buybacks?

I ask these questions rhetorically because it shouldn't do any of them -- unless, of course, its board of directors chooses to. While complaining about Wal-Mart has become somewhat of a pastime among consumers, the reality is that Wal-Mart is a capitalist, profit-seeking enterprise. And, critically, its board has a fiduciary duty to act in the best interest of shareholders. If its directors don't do so, they can (and likely will) be held civilly liable for their transgression.

Is it unfortunate that so many of Wal-Mart's employees make so little? Absolutely. It's a tragedy. I can only imagine trying to raise a family on such a meager allowance. But Wal-Mart is a business, and as long as paying its employees such paltry sums makes economic sense both from a revenue and expense perspective, then its board is obligated to do so.

Who benefits if Wal-Mart's washed up?
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Read/Post Comments (21) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 08, 2013, at 4:57 PM, betty15 wrote:

    For your information, Wal-Mart promotes and pays better than the industy average. This article does it for me. I have just read the last Motley Fool article . Some of your writers, look like they just started shaving. Maybe you should learn to recognize a great business model. If the minimum wage is raised, it will help all workers, but until then, there is no reason for Wal-Mart to give up its competitive advantage by paying more than Target, Dollar General, Family Dollar, Dollar Tree, Fred's and all the rest. Go check the facts, stupid. This is the last time I will be replying or reading any article from Motley Fool, since I think you guys don't have brains enough to fill a thimble.

  • Report this Comment On December 08, 2013, at 5:06 PM, JohnMaxfield37 wrote:

    betty15 -

    I'm sorry you were disappointed. However, if you read the entire article, you'll likely find that we're in agreement on the main point you raised.

    As I noted in the second to last paragraph: "While complaining about Wal-Mart has become somewhat of a pastime among consumers, the reality is that Wal-Mart is a capitalist, profit-seeking enterprise. And, critically, its board has a fiduciary duty to act in the best interest of shareholders."

    John

  • Report this Comment On December 08, 2013, at 5:13 PM, deadcarp wrote:

    What a croc, John. Around here Walmart pays reasonably well unless your idea is the record number of people on unemployment and social security disability as being "better paid". They employ many disabled and provide low cost goods to the proletariat. Your last paragraph doesn't really reach the level of putting lipstick on a pig. It is interesting that you can a number of fellow Fool (didn't realize how apt this nomenclature was) writers seem to have a strong anticapitalist bent. Like Bettie I will D/C my long standing Fool link and paid advice.

    Ridiculous.

  • Report this Comment On December 08, 2013, at 6:00 PM, duuude1 wrote:

    Don't worry John, those two (betty and carp) are both probably Walmart shoppers, just living in different aisles. They'll meet up and live happily ever after.

    I do need to dispute a couple items. For example, you say:

    " If Wal-Mart were to enrich its employees, it may very well lose them as customers."

    Paying reasonable living wages, and enriching, are two completely different concepts. No one it talking about enriching. Henry Ford did not enrich. He did bring out of poverty - which is different.

    Walmart, in contrast, is holding people's head's down under water. The fact that others do the same makes it - socially acceptable?

    One of the stakeholders in any company includes your employees. They *can* also be your best ambassadors and customers - if they are treated well to start with.

    An investment doesn't become an investment until you put your capital at risk and then nurture it.

    This should be the foundation of employee relations.

    You also say: "And, critically, its board has a fiduciary duty to act in the best interest of shareholders."

    The board has a duty to benefit ALL of its stakeholders, of which shareholders should be the most patient and last to be served. That's the idea of the great companies (formerly J&J and their once great Credo which they only pay lip service to now; and more now Amazon where Jeff Bezos makes it clear that shareholder and Wall Street concerns are appropriately last).

    The J&J Credo once made it clear that it would prosper by attending to business fundamentals and put customers first, followed by other stakeholders including employees, and then LAST shareholders. THIS is what made them great in the early years.

    Duuude1

  • Report this Comment On December 08, 2013, at 6:05 PM, chiagents wrote:

    Not that I want to nitpick, but shouldn't pie chart be divided into United States and abroad (instead of "aboard")?

  • Report this Comment On December 08, 2013, at 8:09 PM, deadcarp wrote:

    One duuude1.... " those two (betty and carp) are both probably Walmart shoppers, just living in different aisles" ......is I assume intended as a derisive comment regarding the unwashed masses that shop at Walmart. Tsk,tsk, here I thought you were such an erudite and compassionate person. Who knew?

    In reality I do occasionally shop at Walmart and the spouses of some of my employees work there. Many have held positions there for decades and love it. I know what their pay structure is like. Do you?

    OTOH for 40 years I have made a point of paying my employees at least 40% above the comparable pay for their job description/position. Not to boost the economy, I’m not that dumb, but as a good business practice to deliver the best service with the best people. It pays for me.

    You and John Maxfield want to artificially boost Walmart wages (you guys listening to the union PR people again eh?) which will in effect create Costco or Kohls. Step up the pay and step up the prices is a fairly simple concept unless, of course, you are a huge fan of central planning. If we arbitrarily double everyone’s salary we create a worker’s paradise and any thoughts to the contrary is the Scrooge of Christmas. Yes, it all makes sense.

  • Report this Comment On December 08, 2013, at 8:30 PM, deadcarp wrote:

    Also, as usual the CEO's total compensation is always dragged out for drama. Let's eliminate Mike Duke's position and spread that $27.8 million annual compensation over the 2.2 million employees. Yep, they will get slightly north of $12.50 each per year, minus of course Fed, State, and FICA. Maybe they will feel like the swells too flush with that cash but without a CEO whom would you carp about? What a dilemma.

  • Report this Comment On December 08, 2013, at 8:35 PM, duuude1 wrote:

    Awwwww duuuude, carpman I thought you had D/C'd already. Caught with my foot in my mouth as usual.

    Erudite and compassionate? Whatever they are, not really. I just want maximum returns on my stocks, and I've always had an eye on Walmart but never pulled the trigger for various reasons.

    I shop there occasionally as well, so I am not by any means "above the masses". Just a frugal duuude. But I've seen enough to not want to invest.

    I think you are very mistaken, in that John and I have opposite views. You and I are actually closer in views, but you're threatening to quit the service and I'm not.

    I'm advocating that businesses be smarter and on their own initiative recognize that paying more for better performance and better motivation will return more to the business than the few $$s expended.

    Did you happen to see anything about central planning in my diatribe against John's points? Were you by chance trying to call me a Communist?

    Duuude1

  • Report this Comment On December 08, 2013, at 9:34 PM, deadcarp wrote:

    Dearest Duuude1

    Communist? Nah........

    Commie, Nazi, racist are usually discussion-enders when one runs out of logic. Must admit that central planning has just taken over 1/6th of the economy so I'm always on the lookout for such.

    I don't own Walmart shares but as I mentioned I do know individuals that work there (the husband of my office manager of 32 years for one) and have seen what I consider examples of corporate responsibility. One is to stay in business, of course, but also hiring the handicapped. Maybe our local Walmarts are unique in this respect but I don't think so. When this all first appeared about 5-6 years ago I made a point of stopping by a Walmart and asking re starting pay and medical insurance. Two guys, clerks picked at random, stated that starting pay then was as low as $10 per hour but frequently $12 and up depending upon experience. Medical insurance was available with employer/employee cost sharing. One local Walmart employee I ran into enthused it was the best job they ever had. She was the head of their automotive service center. African American, female, head of "manly" automotive. Imagine that. Perhaps I haven't seen people slaving away in the galley.

    Anyway, enough and sorry that my comments made you turn "red" ;-) Just kidding.

    BTW I did ask for a refund on the My Fool paid portion but member services only works M-F. Now if Henry Ford were alive he would double their wages and we'd get 24/7 service. I'm tired of the current class warfare rhetoric response to a weak economy (yeah, stocks are propped up by a ever growing mountain of debt) There have been a couple other Fool articles which to me were in the same vein. Doesn't matter as at least for now I have the right to shop and buy goods or not from Walmart or Motley Fool.

    BTW Henry Ford didn't create the $5 day just to boost the economy and peoples lives as John implies. Read Larry Summers Harvard paper from the 80s on this subject. Multifactoral and set in a whole different world of competition.

    Sincerely

  • Report this Comment On December 08, 2013, at 10:37 PM, duuude1 wrote:

    Well carpman, despite the bumpy intros you're all right.

    Maybe I can convince you to stick around and vigorously debate the young Foolish whippersnappers here instead of cancelling and leaving the field.

    It's funny, I'm not a paying member now since I effectively retired and am in grad school and have to live within my poverty-level stipend - but I was able to retire in my 40's due to following the recommendations here at the Fool. What they advocate really works. And part of that is healthy disagreements among folks with very strong and sometimes diverging opinions.

    I detect some alignment between you and I, but I suspect there are many areas where we disagree - and I'd rather have a healthy respectful argument and possibly learn something - than to live in an echo chamber where everyone parrots the same comforting lines.

    Whaddaya say carp?

    Carp?

    Darn, gone already. He's quick with the cancellation for an old duuuude.

    :)

    Duuude1

  • Report this Comment On December 08, 2013, at 10:50 PM, deadcarp wrote:

    "Whaddaya say carp?"

    Old? Whatdyamean OLD? That's worse than commie for sure. Now it's outta here for sure.

    ;-)

  • Report this Comment On December 08, 2013, at 11:26 PM, puppybone69 wrote:

    This article reminds me of Undercover Boss, nothing but propaganda designed to make you drink koolaid!

  • Report this Comment On December 09, 2013, at 12:07 AM, rocsoe wrote:

    Your Henry Ford example is bogus. Henry Ford was, first and foremost, a businessman. His increase in pay was to address high turnover and training costs on the assembly line. I wish you folks would quit using Henry Ford as an example for everything. You instantly lose credibility with your arguments when you do.

  • Report this Comment On December 09, 2013, at 1:44 AM, kyleleeh wrote:

    In addition to roscoe's comment, when you factor in inflation and the average factory work day length back then, Henry Ford was paying his workers about $4 an hour in todays dollars, and that's total compensation, there we're no benefits back then.

  • Report this Comment On December 09, 2013, at 8:09 AM, sutarts wrote:

    I think I heard a few years back that most Costco employees made around $20 an hour. They are smaller than walmart but they work the same as sams club. I am sure that those employees appreciate the pay and just as well spend it right back into the company they work for. Maybe if Walmart paid there employees then they would be appreciative and they would HELP you when you go into the store to shop instead of waiting for 20 minutes to try and find someone to help you and the shelves would be stocked. I went to my locale walmart to get a few things from the hardware dept and they only had 1 item that i needed out of 4. I went back 2 weeks later and the isle looked exactly the same as it did 2 weeks prior and still did not have the item I needed of coarse. I worked there quite a few years ago and forced me to work beyond what I was able and I was even locked into the store by the assistant manager because I was leaving at my scheduled time. that only lasted untill I called the cops, but my point is they want you to work like slaves and not pay a good wage.

  • Report this Comment On December 09, 2013, at 8:18 AM, fredricjl wrote:

    I thought this site was supposed to teach about finance, but I find it has degraded to political commentary. Time to give it up I guess, too bad. The Walmart employees who are dissatisfied can always leave and find another job to their liking. No one has a gun to their head. The same for all those fast food employees. I am sick of all this pandering from the potus on down. This is a republic, you have the right to pursue happiness but it is not guaranteed, suck it up and move on!

  • Report this Comment On December 09, 2013, at 8:44 AM, Mathman6577 wrote:

    @fredricjl:

    Don't give up. There is still good investing and finance information here at the Fool. My recommendation is to ignore anything w/ Wal-Mart, Costco, Apple, Amazon, living wage, minimum wage, etc. in the headlines or keywords. For some reason they are "hot buttons" and both the articles and comments are distorted (in both directions) to say the least. Check the CAPS pages and information/comments from Fool members on individual stocks. You will learn a lot.

    One thing you are likely to find is that both Wal-Mart and Costco are well liked by (most) investors. Who wouldn't like Wal-Mart, a company that has paid and increased its dividend every year since first offering it in the mid-1970's? My thought is: "if you don't like a company don't buy their products, don't invest, and don't work there. Otherwise please keep your comments to yourself and don't tell me what to do".

  • Report this Comment On December 09, 2013, at 10:14 AM, miteycasey wrote:

    If the people don't like the pay at Wal-Mart go work somewhere else. It's that simple.

  • Report this Comment On December 09, 2013, at 10:17 AM, ljs5451 wrote:

    Dear Motley Fool, Please hire a damn proofreader. There are so many mistakes in your article, I can't read it.

  • Report this Comment On December 09, 2013, at 11:05 AM, mesofuzzy wrote:

    I think a more accurate comparison might have been to coal companies back in the day when you we essentially forced to shop in company stores, live in company houses, etc.

  • Report this Comment On December 10, 2013, at 6:39 AM, theotherNYTom wrote:

    The problem is not Wal-mart's pay rate. Wal-mart was never suppose to support a family, it is an entry level position in the work force. Something for teenagers, college students, and seniors looking for a few bucks, or someone looking to take their time advancing with a large company. The problem with the Wal-mart economy is that they have moved every $15-$30 an hour manufacturing job overseas so that everyone can get the lowest price. Unfortunately the retail industry as a whole has done this and there are no longer a large middle class job pool to move into to raise your family or buy retail goods. This is both the general population's and the retailers fault. To save a penny today, is pound foolish tomorrow. Buy American and you will see an increase in middle class jobs freeing up cash to for people to buy stuff. But the retailers have to have American goods for sale.

    Capitalism 101... Consumers will buy if they have money to spend. No supply of money, low demand for goods. Amazing that for $___m CEO's and economist can't figure that out.

    To have a positive economy you have to raise people out of a grass hut, not beat them down to one, which means good pay for good work. In a positive economy everyone wins and wealth is shared. No economy has ever survived keeping the poor poor, eventually it hits a wall of change and those willing to change first, tend to be the winners in the end.

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