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Study: Employee Raises More Than Pay for Themselves

November 27, 2012

Looking back, 1962 was a pretty big year for my family. It was then that my father was promoted to a dairy department manager at a store operated by a large supermarket chain. Thinking in today's terms, it might not seem like much, but back then it allowed him to give up a second job driving a truck because he was earning enough to support his wife, three young kids and mother-in-law. We weren't rich, but we never wanted for anything. Things improved as other promotions followed.

A few years back, I met another retail store department manager. The single mother of three was employed full-time by a chain and, similarly to my father, had worked her way up from a stock position. The difference, however, between where she was financially in her career compared to my father at a similar point was stark. I met the woman and her children at a program that helps the homeless find housing, medical services and other programs for families struggling in poverty.

The question of just how much retailers can "afford" to pay their employees has been a matter of debate for years. Some chains such as Costco, The Container Store and Trader Joe's are lauded for their compensation practices while others are often criticized.

Now comes a new study from Demos, a liberal think tank, which concludes that not only can the nation's largest retailers (those employing at least 1,000 people) afford to pay workers substantially more, but that the chains, workers and the national economy will benefit greatly as a result.

The study assumes a new wage floor of $25,000 a year for roughly five million retail workers, a substantial increase from the current $21,000 paid to sales associates and $18,000 for cashiers.

The increase, according to Demos, would represent roughly one percent of total sales among large retailers. Passing the cost of increases to consumers would be negligible, adding only about 30 cents to the cost of the average shopping trip.

Demos projects 100,000 new jobs would be created, adding between $11.8 billion and $15.2 billion to the nation's gross domestic product. Between $4 billion and $5 billion in additional revenues would be spent at retail one year after the pay raises go through.

The research also concludes that wage increases are a more productive investment for publicly traded companies than popular stock repurchase plans.

"Share repurchases do not contribute to the productivity of the industry or add to economic growth," according to the study. "In 2011, the top 10 largest retailers alone spent $24.8 billion on stock repurchases, billions more than the $20.8 billion all large retailers could have productively invested in their workers."

Discussion Questions:

What do you think would be the effect on the retail industry and the economy if wages were raised for full-time workers? Could large retailers afford to pay workers the wages suggested by Demos and still maintain their competitive positions?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

How would raising wages for full-time workers in retail affect the competitive positions of large employers in the industry?

Comments:

Wages do not produce results in a vacuum. The challenge to this thinking is just giving the gal who gets $8 an hour $10 an hour means she'll deliver a $12 an hour job. Without additional retail sales training, she'll probably still deliver the $8 an hr job.

Most retailers should operate on the idea your raise becomes effective as soon as you do. Help us lift sales, you're rewarded. If a retailer can partner to increase their customer skills, the proven path to higher sales is there and can justify the raise in pay.

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Bob Phibbs, President/CEO, The Retail Doctor

I think it would add a lot of respect for the industry that deserves a lot of respect. It would make the industry more attractive to more talented men and women. It is the industry in which one in four Americans work. They should be paid more.

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Frank Riso, Principal, Frank Riso Associates, LLC

Retailers will give you the thousand reasons why they can't do this. Health insurance, employee commitment, turnover makes it not worthwhile, etc. etc. etc. So it's not going to happen in any case.

There's a great New Yorker cartoon I saw on Facebook today. It's a man in a tattered suit sitting around an open fire with 3 children. He says "Yes, the planet got destroyed, but for a beautiful moment in time we created a lot of value for shareholders."

As long as this is the core tenet of corporations, things are not going to change. And ironically, as more people shop online because the in-store experience is so annoying, we'll lose even those low paying jobs. Somehow this whole Grey Thursday thing has made me feel especially dark about our future as retailers.

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Paula Rosenblum, Managing Partner, RSR Research

I'm not an economist. I'm not a socialist. But, I am moving more and more in the direction that this study supports.

Would there be an upswing in everything from A to Z as the study suggests? I don't know. But, the people on the front lines would certainly start living a better life and be properly recognized for what they bring to the table. Costco gets that in spades and their performance shows it. Banks, on the other hand, don't. They earn billions, yet pay the majority of their branch staff peanuts.

Yes, shareholders need to be looked after. But, get in line. The employees of a company come first. The good news is that when you put employees first with pay and treatment, they give you much more back than you ever imagined. And there is the payoff for the shareholders.

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Kevin Graff, President, Graff Retail

I have always thought a stable workforce is important. We spend a lot of resources trying to identify everyone in our stores, but it is equally important that the customer recognize the store associate. The challenge of course becomes maintaining a labor rate. The savings may come in supervisory costs. With more senior people on the floor it might be possible to reduce the "suits."

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Bill Bittner, Principal, BWH Consulting

I'd love to be wrong, but IMHO, publicly held chains that tried this would face hissy fits from securities analysts and many shareholders, which could lower the stock price, thus negatively impacting the entire enterprise. I think you'd need bullet-proof cause-and-effect research to prove the point, but some retailers would still fear taking the plunge. I do think that the way retail workers are compensated is horrific, by the way, and contributes to the lackluster reviews shoppers give to brick and mortar retail in general. To my mind, it's speeding the growth of online.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

This would have a very devastating effect on many lower wage workers. Not all retail workers are created equal. Costco, Trader Joe's, and the Container Store typically hire younger, fitter, better looking people who worker harder and smarter than the typical retail employee. That's their business model. They are not paying people more out of charity. These companies pay more because they expect more and they are getting more too.

Now if companies like Walmart were to simply raise the wage of its lower wage employees by $7,000 a year, there is no way they are going to keep the minimal skill people around. They are going to expect some kind of return on this pay increase. What they will end up doing is firing the less than ordinary people and replace them with those worthy of a higher wage, most likely with smarter and more productive employees.

Soon reality kicks in. As those low wage earners start getting a pay raise, they begin to see their entitlement benefits such as Food Stamps, Medicaid, and Earned Income Credit start to disappear. Perhaps losing thousands more in entitlements than their pay raise. These workers know this and that's why we don't see them out protesting. They know that a pay raise only hurts their personal bottom line.

David Livingston, Principal, DJL Research

The answer is probably yes, and I agree that it would help the ecomomy overall. The fact that Costco and Trader Joe's do the right thing when it comes to employees should be something that the consumer/shopper should support wholeheartedly. So overall, I think this should be followed by many other retailers. The problem is that most of us also want low prices so how to strike the appropriate balance is the challenge. Someone working full time in retail should not have to stand on a line for the homeless. Maybe, we, as Americans ought to encourage fair treatment of retail workers by supporting retailers who are leading this charge with their actions.

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Zel Bianco, President, founder and CEO, Interactive Edge

For the first time in memory, I have to disagree with Bob Phibbs, who is definitely one of the brighter lights in our chandelier. Unions prevent rewarding good work - it's always based on seniority, and many retail workers are union members, so it's not that simple to base pay on effort or results. In my life, I've been a member of the Teamsters, Amalgamated Meatcutters and The Newspaper Guild, and they all went out of their way to protect laggards and to keep good work from being rewarded. From what I understand, that hasn't changed. Very demoralizing, and bad for everybody except, apparently, the union bosses.

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Warren Thayer, Editor & Managing Partner, Frozen & Refrigerated Buyer

This reminds me of an instance where we were discussing increasing the wages of our 5,000+ employees and the HR department suggested giving everyone an X percent increase. My response was similar to Bob's. I saw no value in giving everyone the same percentage raise just because it was the easiest thing to do.

Instead we determined what the agreed upon raise would cost and then determined how best to allocate it across our employee base. That meant we first had to change the compensation programs from an automatic raise system based on time in a position to one based on the skill sets of each employee. Much more work, but far more rewarding for those employees who had demonstrated better skills and for the company as well. What it did do was create pressure on our training department from the employees for a chance to improve their individual skills.

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Steve Montgomery, President, b2b Solutions, LLC

People who work full time in retail should make enough money to support their families. The psychological comfort in knowing that basic needs are being met will make for better employees, which will lead to more satisfied customers, which should generate more sales and profits.

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Max Goldberg, President, Max Goldberg & Associates

The impact is simple to predict, because retail has already been there. Competitive wages beget talent, commitment and productivity. However, wage increases are needed for part-time positions as well. A return to the effective career path model of part-timers moving up the store ladder would help both store operations and the shopping experience.

When I was in high school, the best jobs were in grocery and the manager had plenty of applicants competing for entry positions. During my last few years as a store manager, two-tier wage contracts made it nearly impossible to find talent who would stay beyond the start of their union dues. And today's store managers have it worse -- way too much time is spent on the hiring process.

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Dan Raftery, President, Raftery Resource Network Inc.

Employees receiving those raises would be more likely to be loyal and have more pride in their jobs. In addition, people receiving better wages are also likely to spend more money helping to stimulate the economy. Some of that money (from the company's own employees or those from other retailers) will be spent at the retailer giving higher wages.

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Camille P. Schuster, Ph.D., President, Global Collaborations, Inc.

Retailers need to grasp the value of their employees. They are brand ambassadors that are the human interface to the brand. Shopping is an emotional experience and nothing connects and engages more profoundly than human interaction. All too often, retailers and brands are hoping technology will replace humans because, let's face it -- it's cheaper! Retailers need to reward their finest brand ambassadors! They are your front line soldiers in a very competitive landscape where your enemy is mediocrity and employees with 'it's just a job' attitude. Recognizing and paying your best employees a fair wage will pay dividends that go well beyond the share price. Don't let CFOs run your business -- it may help the quarterly analysts call, but it won't help your customers or your brand in the long run.

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Adrian Weidmann, Principal, StoreStream Metrics, LLC

Another utopian made-up presentation with no understanding of the real world. Fact is, associates can be paid more, but only if they produce more sales and/or lower costs. Just paying someone more does not achieve anything. The buyback argument has no merit. Part of any company profit is depreciation on prior investments. Only companies that invest an amount greater than deprecation are growing. When a company does not see growth opportunities or investment returns, they will repurchase their stock. This is normal and typically occurs during economic downturns.

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W. Frank Dell II, CMC, President, Dellmart & Company

Having a higher earning potential would undoubtedly attract bright and motivated people who right now won't even look at retail possibilities.

But this article talks about raising the salary of existing employees and that's a different story. It is most likely that many employees would say "It's about time!" feeling they deserve it; not with a view to the future, but as if this is 'make-up money' for the scrooginess of the past. They'll take the money with no change in behavior. Giving a lousy driver a nicer car isn't a winning strategy. Something much deeper needs to happen.

On the other hand, if retailers back up and think about how to create an energizing environment that is meaningful AND rewarding financially, they'll be on a winning track. Throwing money at the problem is one of those typical mechanistic things we do so often and never seem to learn the lesson.

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Ian Percy, President, The Ian Percy Corporation

Working in a retail store used to mean a steady paycheck that would support a family. Most of us who are "of a certain age" clearly remember this, and it's no longer the case. Raising wages would mean clear improvements in turnover and productivity; it's curious that the volume on this discussion isn't louder.

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Cathy Hotka, Principal, Cathy Hotka & Associates

This is one of those "feel good" propositions made by think tanks that have never run a business themselves -- other than into the ground. The reality is that this kind of thinking is driving automation, and eliminating low paying jobs -- which is still entry level everywhere. Carried to where we actually are, it accounts for the massive unemployment, especially with young people. "Feel good," and have the younger generation living at home until they are 30.

It's tragic, the wide-scale ignorance of how we got the prosperity we have had. For retail, I know of nothing better for correcting this than these two books: "The Great A&P and the Struggle for Small Business in America" and "Sam Walton: Made In America."

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Herb Sorensen, Ph.D., Scientific Advisor TNS Global Retail & Shopper, Shopper Scientist LLC

When you have millions of dollars in stock on the floor and don't compensate accordingly for good salesmanship, you risk associate float, where they will go for better opportunity during your most crucial sales period. You then have to discount deeply to move stock you could have moved weeks ago!

Don't hire tons of people, hire well and keep them motivated!

Kate Blake, Social Media Manager, Take Five with Kate Blake

Let's forget for a minute what the analysts and shareholders might say/do in this situation, and let's look at Apple. I know that when I walk into an Apple store, I am going to get a certain level of treatment. My problem is going to be resolved, or maybe I'm walking out with a new toy. I know I can count on the 'professional' who is helping me and if they don't know how, I know they have backup people that do. This scenario does not come from underpaid employees, but rather from employees treated and paid like 'professionals'. Oh and what do the analysts and shareholders have to say about Apple? 'Nuf said!

Lee Kent, Let's meet share and succeed in Retail, YourRetailAuthority

The flaw in this study is that it refuses to understand the reason that any business exists, and that is to drive revenue and earn profits. No company will ever, nor should ever, make a business decision based on things like the productivity of an industry or an impact on national economic growth.

That doesn't mean that retailers shouldn't increase wages, but they should do it for different reasons.

It's been said that companies that pay more would expect more from their employees, smarter thinking, classier appearances and so on. How is that a negative? They would deliver a better experience to their customers which in turn would justify the slightly higher cost of purchases.

Would it hurt the bottom wage earners who have little to no skill? No. They would be forced to adapt. Skills and new behaviors can be learned quickly. Those who cannot do this would face problems, but those people are far fewer than most assume.

There are many advantages to paying a stable, livable wage. Employee turnover will be reduced, saving millions of dollars in training costs. More permanent employees means greater relationships with customers; they like to buy from people they feel like they know and this means greater brand loyalty, more return visits, and more sales opportunities as a whole.

All that said, people who earn more don't just magically perform better. There must be an easy to understand and realistically attainable incentive system paired with an increased wage strategy. Commissions have gone the way of the dinosaur, but other performance based options exist and must also be employed to ensure continuing increases in performance.

'Tshock'

George's story is telling. Maybe we need to look harder at The Container Store and Trader Joe's. There are significant lessons to be learned.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

This is a great read -- if we were still in the 1990s.

In the 21st century, human beings cost too much while robots and automated supply chain processes have a bigger ROI and lower TCO.

Ed Dunn, Founder, (Stealth Operation)

As I read this post and all of the comments, three quotes come to mind.

"It is not how much I pay you. It is how much do you pay me for the right to work for me."

"There is no future in any job, the future is in the way you do the job."

"The easiest person to leave you and find a better job is your best employee."

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Mel Kleiman, President, Humetrics

I have a retailer friend who owns about a dozen stores. The average yearly wage for someone on the sales floor is about $65k plus benefits. The men look like GQ models, dressed in suits, fit and tanned. The women, mostly over 40 look like former Miss Americas. They are skilled experts in knowing how to separate cash from consumers' pockets and making them feel good about doing it. Charles Darwin sets the pay scale, not liberal think tanks.

David Livingston, Principal, DJL Research

As someone who owns a retail supermarket, I give raises as a means of rewarding my employees, and unfortunately, the State of Ohio now forces a new minimum wage increase every year (thanks, unions). So the concept of raises for performance goes out the window as everyone gets a raise regardless of skill level, which spirals upward to all employees.

Who wouldn't want to pay their employees extremely well? The Apple store employees do not exist in poor rural towns, as they would starve, so for most of us in the real world, we have to adjust to the reality of trying to make a bottom line against the odds.

Obamacare is going to make this situation almost impossible to deal with, as many businesses will be forced to cough up most if not all their bottom line to health care, which will leave little for capital improvements. This is not whining, it is a fact that many small businesses are scratching their heads about the future. The mega retailers will survive by getting waivers and other perks to keep them profitable, but a small business owner does not have that option. My staff does a great job with servicing our customers, and I hope for the best. Competition is brutal, forcing us to give away our profits to stay in line with their big-box stores. All of us wish we had a business in a thriving community, which would lessen our need to squeeze more and more costs out of our business, but the reality is we must adjust or close down. I plan on being around till the last nickel in my account is still there, but there are other store owners who will not want to put up with the headaches; and IMHO, who can blame them?

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Tony Orlando, Owner, Tony O's Supermarket & Catering

Why are so many people working at low-skill, poverty-level jobs when they've reached the age to have families? Why haven't they "paid their dues" in low-skill, low-productivity jobs, so to speak, far sooner in life? Could it be that they're prevented from doing so somehow?

Perhaps by minimum wage laws that essentially outlaw the types of jobs you would work more for the experience than for the pay? Perhaps by being holed up in glorified daycares well into adulthood, when they could instead be working for the sake of getting experience while their expenses are still being mostly taken care of by their parents?

The whole "we should just pay people more" line of reasoning is predicated on the idea that "everything is great and working perfectly except for those greedy capitalists," and it quite enthusiastically avoids any examinations of the root causes.

Tom Cook, Inventory Analyst, Fountain Tire

Let's be honest here: the title of Demos' study really should have been "Walmart should pay more." (According to the study, they employ as many people as the next nine largest retailers COMBINED...old, flabby and unattractive as they might be). One wonders what the point of basically silly "studies" like this is, other than to offset conservative think tanks that claim abolishing the minimum wage will bring Eden...competition of a non-retail sort, I guess.

'notcom'

Our retail industry does not need more wages, but instead to continue to grow their overall positions. Retailers are still fighting tremendous price pressures, inventory and out-of-stock issues, and of course, profitability concerns. Labor wages are where they are because of these other issues, not despite them.

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Kai Clarke, CEO, American Retail Consultants

Margins might decline or—on the other hand—shrink might decline, morale and customer service might grow, and margins would follow.

It isn't a question of what's affordable, it's a question about whether you think of workers as debits on a balance sheet or human beings.

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Ryan Mathews, Founder, ceo, Black Monk Consulting

I believe there would be a positive effect to higher pay at retail. Better wages would be equated with better retention, better and more efficient workers, etc. This "race to the bottom" that retailers have engaged in over the past years has resulted in high turnover, poor performance, and—no surprise—very poor customer service.

Donna Brockway, President, FutureRetail

It is really terrific to see retailers here giving critical attention to the Demos study. As a former business owner in the health services industry, I do realize that these problems are more than just abstract theory. That's one of the reasons why Demos and I thought it would be useful to evaluate the possibilities for adopting this business model across the retail sector, especially as the importance of retail to the US economy continues to grow. As many of you mentioned, some retailers (like Costco or ShopRite) already operate using a wage plan that pays their workers higher wages than the industry average and still return real profits to shareholders (Costco, for example, is able to pay out a special $3 billion dividend because their financial position is so strong).

Empirical research substantiates the relationship between high wages and productivity gains. As commentators here noted, and studies assessing actual balance sheet data from firms reveal, building a loyal, experienced, and knowledgeable workforce does offer tangible benefits to the firm. But as one expert - MIT Business Professor Zeynep Ton - observes, "the financial benefits of cutting employees are direct, immediate, and easy to measure, whereas the less-desirable effects are indirect, long term, and difficult to measure." Firms have a choice between a short-term strategy viewing their workforce as a cost to be minimized, or a long term one that sees workers as an asset that can be leveraged for increased returns in the future. Some retailers operate according to the first strategy and others the second, but experience and profit rates show that both are viable business plans.

And what if more retailers chose to adopt the long-term view? Unlike productivity benefits, the returns to business and the economy from high wage employment can be quantified based on widely accepted measures. In the immediate term, 20 to 25 percent of the wages paid out will come right back to the retail sector as consumption increases (that's $4 to $5 billion in the first year based on the wage raise we modeled). But retail can also be lifted up by overall growth, and in a consumption-driven economy the sector can hardly escape the correlation between the success of an individual firm and that of the economy as a whole. Measuring the returns to the sector from the consumption growth associated with a wage raise can help the sector determine whether the investment will produce returns. Our measures show a first-round effect of at least $11 billion in GDP and 100,000 new jobs.

Finally, it's important to point out that someone is already paying the difference between low wages and living wages in the workforce - taxpayers. Where full-time workers rely on public assistance from food stamps, Medicaid, or S-CHIP, the public pays a subsidy to low-wage firms that allows them to rely on a large workforce without having to ensure their staff earn enough to be even minimally healthy and productive. Low-wage employers have already tied their earnings to the overall economy by transferring a portion of their costs to the state. So whether we're talking about profits, growth, consumption, or living standards, everyone shares the fortune of retailers and retail workers. The Demos report provides one means to maximize that value.

Catherine Ruetschlin, Policy Analyst, Demos

Full-time workers can be paid more. I have little question about this. However, the decision to pay workers more is one to treat them as valued members of the company, rather than as expendible cogs in a wheel. A decision to more highly value employees is one that pays more, trains more and seeks feedback more from the people who have the real customer insight—those on the front line with the customer each and every day.

Would this be a valuable move? Just look at companies like Starbucks and Organized Living for success stories. However, I find such a chance somewhat unlikely—it takes a paradigm shift for retailers.

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Mark Price, Managing Partner, LiftPoint Consulting, Inc.

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