McDonald's(NYSE:MCD)and Wal-Mart have been frequent co-defendants in the ongoing trials of the employee wage debate, and the recently announced pay hike at Wally World could leave Ronald and friends feeling lonely. In April, Wal-Mart will institute a new policy to raise its minimum wage to $9 an hour. By next February, the retailer will pay at least $10 an hour.
Coming from the largest private employer in the country, the announcement has already prompted Target to boost wages, and it is prompting the market to consider which other large companies may soon follow suit.
To that end, we asked three Motley Fool contributors to weigh in on whether McDonald's should raise its minimum pay and what doing so might mean for the company. Here is what they had to say.
Tamara Walsh (Yes): McDonald's is under considerable pressure to increase wages. The Golden Arches has been reluctant to do so, despite currently paying many of its employees the federal minimum of just $7.25 an hour. However, this is not only in the best interest of employees but U.S. taxpayers as well.
You see, it is taxpayers like you and me who ultimately carry the burden of the company not paying its workers a livable wage. In fact, economist Sylvia Allegretto calculates that an astounding $7 billion a year in public assistance goes to American fast food workers in order to help offset their meager earnings. That is $7 billion dollars coming out of taxpayer pockets. Moreover, according to Bloomberg, McDonald's employees have received the most public aid -- to the tune of $1.2 billion a year.
Yet, instead of facing the problem head on and gradually raising its wages, McDonald's offers underpaid employees a "McResource" help line, which assists employees in enrolling in state and local aid programs. Therefore, from a taxpayer standpoint alone, I believe it is time the company invests in its people by paying them better wages.
Longer term, higher wages would likely mean less employee turnover. According to a report from the Harvard Business Review, "the full cost of replacing a worker who leaves is typically 1.5 to 2.5 times the worker's annual salary." Therefore, over the long run, lower turnover rates might actually save the fast food king money.
Andrés Cardenal (Yes): McDonald's should give some serious consideration to raising wages. To begin with, higher wages do not necessarily translate into increased costs and lower profits, at least not to the same degree. Lower employee turnover and higher productivity can be crucial advantages to consider in this area.
The Harvard Business Review report also compared the financial impact of different wage policies at Costco and Wal-Mart, and the result was quite telling: According to the author, "Costco's stable, productive workforce more than offsets its higher costs."
Consumers have made it clear they are more inclined toward fast casual restaurants offering a higher quality menu with fresher ingredients. This is a particularly strong trend among millennials, a crucial demographic segment in the industry. Also, increased complexities at the kitchen due to menu innovations are hurting the speed and quality of service at McDonald's.
If the company wants to jump-start sales by offering higher quality products that resonate with diners, the company will need to make sure it has the manpower to implement those changes without further hurting service quality. Higher salaries attract and retain more qualified, better motivated employees which should be a smart move.
Wall Street usually thinks about wages solely as an expense on the income statement. However, human resources and the right corporate culture can be one of the most important ingredients to building a successful business over the long-term -- perhaps even the most determinant factor.
Keith Noonan (Not yet): There are plenty of good reasons McDonald's should raise its minimum wage, but I do not think the company should take the plunge quite yet.
Relations have been strained with franchisees in recent years, and store owners are facing additional costs from higher-quality ingredients and in-store upgrades that could make higher wages less palatable. More than 80% of McDonald's stores are independently owned, and same-store sales have been on a worrying trajectory, recently undergoing a 4% drop in February. Additionally, some 21 states have already raised their minimum wage in 2015, and McDonald's might benefit from first surveying what effect these pay increases have on its restaurants.
The company has also recently indicated that it is on track to make good on its goal of repurchasing $18 billion and returning $20 billion to investors from 2014 to 2016. It is establishing a history of dividend raises with seven payout increases since 2008, but implementing wage hikes at all locations could disrupt these trajectories.
I agree a minimum wage bump has the potential to improve public perception and in-store operations, and I expect the move within the next couple of years. However, the company should figure out its menu changes and make a bit more progress in automation before foisting a wage hike on franchisees.
Andrés Cardenal has no position in any stocks mentioned. Keith Noonan has no position in any stocks mentioned. Tamara Rutter owns shares of Target. The Motley Fool recommends McDonald's. 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.