This is part 2 of our series dispelling the myth that a company's profitability depends on rock bottom pay. To read Part 1, click here.
Since the Great Recession, low pay and stagnant wage growth have been the new normal, but Walmart's announcement that it will be giving a raise to 40% of its workforce hopefully signals that earnings are set to increase. Higher wages are obviously an advantage to employees, but they also benefit the companies that employ them. Organizations that offer paltry pay could be forced to increase wages in order to stay competitive. This trend is already playing out as TJX, which owns a variety of retailers, including TJMaxx, Marshalls, and Home Goods, announced immediately after Walmart that it will raise workers' base pay to $10 by 2016.
Any company offering higher wages is not doing so out of altruism; they have competitive pay because it is profitable for their organization. Livable wages attract more talent, increase worker productivity, reduce turnover, and at the end of the day add to a company's bottom line.
When a company offers higher wages, and especially when they are early adopters of higher pay in their industry, they will attract a higher quantity and quality of applicants. Last year when Gap announced that it would raise its minimum wage to $10 an hour, the amount of applications rose 10% (Bloomberg Business, 6/24/2014). Organizations that offer higher pay are rewarded with an applicant pool that has a higher IQ and with personality scores and motivation that make them a better fit for advertised jobs (Peterson Institute for International Economics, 1/13/2015). Walmart's choice to increase wages before other major companies such as Target and McDonald's positions it to attract and retain more qualified employees from a talent pool that is becomingly increasingly competitive and desirable. The low-wage model may reduce the cost of labor but does not do any good for a company's costs overall. Currently, about 44% of Walmart's 2.2 million hourly staff turns over each year (Bloomberg Business, 2/23/2015). Finding, hiring, and training replacements even for low-wage workers costs about 16% of an employee's annual earnings, and when nearly half of your hourly workforce is jumping ship, those costs quickly add up. With falling same-store sales and two straight years of stagnant earnings, Walmart is being forced to change its business model that is no longer sustainable in a tightening job market.
Many other retailers have already mastered the lesson that Walmart and other companies are just learning. At Trader Joe's, starting pay is $40,000; employees at Costco make on average $21 per hour; and staff at The Container Store make an average of $50,000 per year (USA Today, 10/17/2014). Costco's turnover rate is 17% overall and that number plummets to 6% after one year of employment (Bloomberg Business, 2/23/2015). All of these organizations operate in a competitive marketplace and refute the idea that retailers must pay measly money in order to make profit. Their happier, more productive employees also provide better customer service and more satisfied, loyal clientele. QuikTrip, a Fortune 100 convenience store and gas station chain, pays an entry-level salary of around $40,000; it's turnover rate is 13% (compared to 59% for the top quartile of the convenience store industry), and its per square foot sales are 50% higher than the industry average (The New York Times, 3/21/2014).
It is a myth that companies, especially organizations in low-margin industries, must constrict wage growth in order to remain profitable. Especially as the economy strengthens and competition for talent increases, companies must consider offering better pay if they want a more talented workforce, more loyal customers, and a stronger bottom-line.
Readers, do you think more companies will raise wages as the economy improves? Comment and let us know!