Are wage caps good or bad for a retailer’s business?
Wal-Mart’s recent announcement that the company would increase its starting wage for all employees was greeted with almost universal praise (albeit grudgingly from the company’s critics). Less well received was Wal-Mart’s decision to place wage caps on certain jobs regardless of an employee’s tenure with the company.
A number of Wal-Mart associates, interviewed by The Associated Press, expressed concern about what the wage caps would mean for them.
Ramiro Gonzalez, has worked six years in the produce department of a Wal-Mart Supercenter in El Paso, Texas.
Mr. Gonzalez who makes $11.18 an hour said, “Everybody’s angry. Everybody. Especially the people who’ve been there 15, 20, 25 years. They’re almost certainly above the pay caps.”
Amy Harr, a personnel manager at a Supercenter in Columbus, Ohio, said there are other things she looks at besides hourly wages.
“There’s scheduling, I can take time off when I want. There is the 401(k), stock options, profit sharing. I like what I have,” she said.
Ms. Harr has been capped out at $19.84 an hour (her present rate) versus Wal-Mart’s new limit of $19.25 for the position.
To advance to a higher pay scale, Wal-Mart workers such as Mr. Gonzalez and Ms. Harr will have to move on to new better-paying positions.
Peter Cappelli, a professor of management at the University of Pennsylvania’s Wharton School, said many other retailers employ pay caps in their compensation programs.
“Firms adjust their compensation packages all the time. The big reason that they might decide to lower the top of the range is that they decide that they’re not actually adding
much value once you’ve been there for a long time,” he said.
Discussion Question: Are wage caps, on balance, good or bad for a retailer’s business?
Some have suggested that perhaps Wal-Mart is using the caps as a way to rid itself of more costly longer term employees.
John Simley, a Wal-Mart spokesperson, told The Associated Press, “To think we would get rid of long-term associates is ridiculous. Their value to
us is very high. They add experience, they help develop new associates and they reinforce the culture.”
Wage caps are not good. Anytime we place a limit on the reward we are willing to pay someone, as an incentive to perform, it will limit performance which has a direct reflection on customer satisfaction. Wal-Mart has built its reputation on serving customers and limiting any aspect of this will only negatively impact employee performance. Wal-Mart needs to align itself with modern human resource practices as well as proven industry compensation methods and incentivize employees on their performance, not limit this.
Are all Wal-Mart employees subject to a salary cap? Or is it just the lower paid employees? Doesn’t a wage cap disincentivize a current employee or make an outstanding candidate think twice about the company? Isn’t part of the American Dream the thought that a person can come from nowhere and the sky is the limit? Don’t wage caps act as a damp blanket? Perhaps long-term employees don’t have more added value, but what is the additional cost of turnover and training? Are there bonuses on top of the wage cap? Are the bonuses capped as well? Are the top execs wage capped as well? Lots of questions…not sure the answers will be good or fair.
The question is not how it affects the industry because everyone is going to wait and watch to see the impact on Wal-Mart. The real question is what will be the impact on loyal Wal-Mart employees who have been with Wal-Mart for a number of years. If stock prices do not rise and their wages are capped, people will not receive additional compensation. As a result, their loyalty and motivation may suffer and that would have a negative impact on Wal-Mart. Why would people want to spend their career working at Wal-Mart (unless there is little or no other choice in their community) if they have no hope of a pay raise?
Great publicity angle: loyal Wal-Mart people can get ahead financially and be trained for promotion to better jobs. Bad publicity angle: higher-paid people at Wal-Mart aren’t appreciated if they’re unpromotable. Surely this natural, reasonable way of managing payroll could’ve been communicated more successfully.
I think wage caps are good for the business. As for the employee, it depends on the individual. If an employee is satisfied with their job and has no desire to advance, then wage caps will hurt them. On the other hand, requiring certain employees to advance in the company in order to get a raise is supposed to make them more motivated and competitive. This helps Wal-Mart decide who is a “keeper.”
After reading all these comments I got to thinking. Perhaps if Wal-Mart offers higher starting wages they can be more selective in who they hire. This is good for everyone. In some parts of the country Wal-Mart has had to reduce store hours on Supercenters because of a shortage of labor. Their starting wages simply have not kept up with the competition and therefore they have been unable to recruit the required staff.
On the the other end, I don’t know of any company who wants to have highly paid unpromotable people on their staff. So why should Wal-Mart? Getting rid of older, highly paid, unproductive workers is business as usual. Whether you are the Green Bay Packers or Wal-Mart, that’s the way it is. Regardless of what Wal-Mart does, the radical anti-Wal-Mart extremists will find some way to criticize their decisions.
Kenneth Grady is absolutely correct. I’m surprised that WM decided to be public about wage caps, since they are universally disliked by wage earners everywhere. Economic realities require that specific jobs be assigned specific values. Failure to do this will result in a bloated overhead structure, or worse, an insufficient number of personnel because too much of the budget is invested in long term individuals. I have worked with many companies who have suffered both outcomes.
I also agree with anyone who writes about creative solutions for specific employees. Adding responsibilities increases the value of a role, justifying the ability to pay the individual more. Finding additional ways for anyone to add value or increase shareholder equity does the same thing. Blindly applied wage caps result in the loss of stronger individuals, assuming the promotion process has not identified them and moved them into higher value roles. Alternatively, wide spread flexibility in role definition creates an unwieldy and unsustainable organizational structure and process flow, one which has become customized to the current people, not to the needs of the business. It is similar to a legacy IT system, which is constantly adjusted at the discretion of individual managers. Eventually, those managers leave, and the new managers are mystified as to how to make the system work.
Some role structure flexibility is an effective response to the economics of long term employees. Too much is very expensive in the long run for large or small companies. Too little may limit the ability of the company to retain above average (yet below excellent) employees.
Many insightful comments above. Mark is right – it’s almost always ‘how’ these things are managed and communicated that’s the problem. And Bernie asks some great questions about senior execs being part of the capping policy.
I know companies that have capped sales people’s income because they were plain and simple making more money than the senior execs. That’s just stupid thinking. If someone is making you more and more money, by all means reward them!
But how can your regular Wal-Mart employee make the company more money? How many are rewarded because an idea they had increased sales of kid’s shoes 17%? Is there any option for performance-based compensation at all at a Wal-Mart?
COL adjustments aside, if an employee is just ‘doing the job’ year after year and not bettering themselves or the company, they should get paid what that job is worth. The counter argument is that surely ‘loyalty’ is worth something. But that leads us into another discussion about what ‘loyalty’ is. From the employee’s perspective does loyalty = showing up? From the company’s perspective does loyalty = ‘Here’s your check’?
Wage caps for positions have been around for a long time and are not unique to retail. While the issue of wage caps is a sensitive one (and what issue about wages is not sensitive?), wage caps are an important tool for companies and employees.
Each position in the company, including the CEO position where wage caps are virtually unheard of, has a certain value. That value determines the appropriate wages for the position (and value takes into account market factors). If the company pays more than the value of the position, it is reducing the profitability of the company which negatively affects all stakeholders.
Employees who are overcompensated face risks. They may adopt a lifestyle based on a wage that cannot be replaced if they lose their job (yes, this is paternalistic but it still is a risk that many employees don’t consider). Overpaying for a job also encourages employees to “work down.” Employees stay in jobs below their abilities because there isn’t as much of an incentive to move to the next level. Overpaying also creates tension in the work place. Employees have a good feel for the relative value of positions and some will resent employees in low value positions receiving as much or greater compensation than employees in high value positions.
Long-term employees may be the most concerned with wage caps. But tenure should not be confused with the value of a position. If the position is competitively priced, there won’t be an incentive for the employee to jump to a different company and lose other potential benefits of seniority (vacation time, profit-sharing, etc.). While tenure is valuable, its value doesn’t translate nicely into greater value for a company or its customers.
Overall, wage caps are appropriate for all levels and lead to greater fiscal health for the company and all its stakeholders.
Bottom line for Wal-Mart – the long-term employee is dispensable.
I think caps are not good for the employee. I think all business should take into consideration a cost of living raise to be given to all employees, not just upper management. After all, without the employees, there would no business. Take good care of your employees and they will take of you.