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.
John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.