Wal-Mart (NYSE:WMT) made big headlines yesterday when it announced pay boosts for its lowest-paid employees. Some investors may be appalled by this "altruistic" news, but don't worry: it makes perfect business sense, and Wal-Mart's smart to do it.
The Bentonville, Ark.-based megaretailer has made waves by announcing that it's raising its minimum salary; soon, its lowest paid employees will make $9 per hour and by next year, the level will go up to $10, well above the federally mandated minimum wage of $7.25 per hour .
Some people aren't jazzed about Wal-Mart's decision. The stock dropped on the news Thursday, and some analysts have issued downgrades. Those are short-sighted responses, though. Wal-Mart's doing the smart thing by working on the most controversial element of its business, and the one that makes many consumers believe its low-priced merchandise just isn't worth the cost to many Americans' personal bottom lines.
The move is going to cost Wal-Mart about a billion dollars, and Wal-Mart's CEO Doug McMillon talked up the morale-boosting element of the strategy, as well as the idea of giving employees "opportunity" and a career path. People may feel cynical about his statements, but the spirit there is right on. Employees who are treated well are more engaged, and are more likely to provide a positive customer experience.
Wal-Mart gets a lot more attention for worker strikes than for its customer service, and that's a problem that's long overdue for a fix.
Take this job and shove it
As it stands now, Wal-Mart's rating on job reviews site Glassdoor.com is a dismal 2.8, with only 44% of reviewers willing to recommend working there to a friend . Compare that to Costco (3.9, 80% would recommend to a friend ), Whole Foods (3.6, 73% would recommend to a friend), and Starbucks (3.7, 76% would recommend to a friend ). We can throw McDonald's in for good measure, since it often shares the hot seat with Wal-Mart -- its rating is 3.0, with just 50% willing to recommend a job there to a pal .
There's been increasing attention to severe income equality and the fact that many people working for companies like Wal-Mart and McDonald's (NYSE:MCD) are making poverty wages (and are reliant on public subsidization, which of course means we all lose). Those in the ivory towers may say the recession's over, but there are still a lot of people out there who haven't seen their wages rise much if at all as the economy supposedly "recovered."
On the other hand, companies like Costco (NASDAQ:COST), Whole Foods Market (NASDAQ: WFM), and Starbucks (NASDAQ:SBUX), all treat their employees well -- making them anomalies in the modern retail industry. (Starbucks, in fact, began rolling out a round of pay raises to baristas earlier this year.) They haven't been subject to nearly the same amount of scathing scrutiny on the worker front as Wal-Mart has been.
Even more pointedly, they have managed to do so while being highly profitable, successful companies, and they have done what well-run capitalistic companies should do: they built employee care into their business missions without waiting for a law forcing them to.
Dollars and cents, not heart and soul
There are plenty of pins we can poke into the happy bubble of Wal-Mart's announcement, not least of which is the fact that we're still not talking about a heck of a lot of money even with the new wage floors. Wal-Mart's wages would still leave some subsisting along the poverty line. Many activists have been rallying for what they peg as a more reasonable $15 per hour "living wage ."
Wal-Mart's also not turning into a big softie. MarketWatch pointed out that the company's press release not only included the news about the pay increase, but also a one-time $0.05 per share charge related to a "wage and litigation matter." We all know that Wal-Mart's been in the hot seat for years, but that is a good reminder that it's facing dollars and cents risks on many fronts, including in court .
And of course, the specter of the possibility of a federal minimum wage hike hangs over it all as well. The truth is, should the minimum wage increase, companies like Wal-Mart that have already started dealing with it will be in a far better competitive and even financial position than those who haven't. They -- and you, if you're a shareholder -- will have a whole lot of peace of mind as the laggards struggle to adjust their businesses.
Positive reinforcement for positive business
All in all, though, maybe even the most critical among us should probably give Wal-Mart some credit for being on the right track. Business can be a force for positive change, and Wal-Mart's high-profile move might help catalyze a little more of a voluntary "race to the top" regarding many Americans' wages instead of the race to the bottom behavior that has been all too common in too many pockets of our economy.
And even the investors who are appalled at Wal-Mart's doling out raises should think twice. Anyone who cares about capitalism and free markets should have always considered the idea that companies like Wal-Mart and McDonald's actually weren't doing any of us any favors by squeezing profits out of people and hardly budging over what the government demanded by law -- resulting in a state in which so many citizens' pay was so pathetically low that they have had to rely on public assistance.
Wal-Mart's no altruist -- it's doing what it has to do, and it certainly seems like it could do more. Given Wal-Mart's massive scale, though, this move will hopefully nudge more corporate managements to see the risk of not moving on this front. Not to mention highlighting to corporate American the importance of investing in its own employees. That would be a win for all of us.
John Mackey, co-CEO of Whole Foods Market, is a member of The Motley Fool's board of directors. Alyce Lomax owns shares of Costco Wholesale, Starbucks, and Whole Foods Market. The Motley Fool recommends Costco Wholesale, McDonald's, Starbucks, and Whole Foods Market. The Motley Fool owns shares of Costco Wholesale, Starbucks, and Whole Foods Market. 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.