Everyone seems to have an opinion about Wal-Mart's (NYSE:WMT) employee pay and benefits. The most recent salvo, a paper from the Economic Policy Institute, raises questions about the Global Insight study that Wal-Mart often cites as offering consumers billions in savings. The report also offers up its own proposal for increasing non-supervisory Wal-Mart employees' pay.
The EPI's opinion might be the most amusing one yet, since it suggests that Wal-Mart can sustain higher wages for employees simply by accepting lower profit margins. The group argues that if Wal-Mart reduced its profit margins to their 1997 levels, employees could use their higher wages to cover the rapidly increasing costs of health care, rent, and other essential services.
Gee, I bet Wal-Mart never figured out that mathematical relationship. Sarcasm aside, while the math can hardly be argued, its unintended consequences can. Taking care of employees is a positive, but lowering margins isn't a healthy way to do so, since it ignores the formidable competition Wal-Mart faces from companies like Target (NYSE:TGT). Like its employees, Wal-Mart has other line items on its income statement that are likely to pressure margins as well.
Witness the grim lessons of the auto and airline industries. Ford (NYSE:F), General Motors (NYSE:GM), and Northwest Airlines (OTC BB: NWACQ) were all once large and profitable companies. But like Wal-Mart, they faced pressure to provide greater pay and benefits packages than they could reasonably support; now they've either crumbled or are crumbling under the weight. All of these companies operate in extremely competitive industries, where being No. 1 or No. 2 a decade from now is anything but a guarantee.
Another example: Long before Sears Holdings (NASDAQ:SHLD) began its recent resurgence, Sears and K-Mart were once separate and powerful retailers, considered unassailable. The decline and near-ruin they ultimately faced could happen to Wal-Mart, too. Trying to extract artificially high compensation packages from the company simply because it's doing well now may lead to higher pay in the short term, but it's an extremely poor long-term policy, as the automakers and airlines prove.
We're all free to debate Wal-Mart's pay policies until we're blue in the face, but let's not forget that Wal-Mart is run for its owners -- the shareholders. It operates in competitive markets, and ultimately it will have to pay competitive rates, or become an employer of last resort. If you don't think that has an effect on the owners of the company and their returns, I think you're sadly mistaken.
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At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
