business news in context, analysis with attitude

The New York Times over the weekend had a story about Walmart, "a company famous for squeezing pennies so successfully that labor groups accuse it of depressing wages across the American economy," made the decision last year to increase employee pay across the board.

"That set in motion," the Times writes, "the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less?

"It is an idea that flies in the face of the prevailing ethos on Wall Street and in many executive suites the last few decades. But there is sound economic theory behind the idea. 'Efficiency wages' is the term that economists — who excel at giving complex names to obvious ideas — use for the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return."

The result of the decision have been promising, the Times writes. "By early 2016, the proportion of stores hitting their targeted customer-service ratings had rebounded to 75 percent. Sales are rising again." However, the impact on the company's stock price have not been so positive.

"The question for Walmart is ultimately whether that short-run hit makes the company a stronger competitor in the long run," the Times writes. "Will the investments turn out to be the beginning of a change in how Walmart and other giant companies think about their workers, or just a one-off experiment to be reversed when the next recession rolls around?"

You can read the entire, fascinating story here.
KC's View:
At the risk of seeming self-satisfied, I must admit that I was gratified when I saw this Times piece. I've been making this argument here for years - that when companies pay people better and empower them more, the result can be an operation in which engaged employees are more productive and effective. Efficiency is fine, but it can't be the only measure of excellence, and the problem with many companies is that executives often are evaluated based on how low they can drive their labor numbers.

(I wish I'd come up with the notion of "efficiency wages.")

People love to talk about how, in their companies, people are their most important asset. But not every company lives up to that premise. I'm not saying that Walmart is there yet, but the direction is the right one.

As for the stock market price ... it is easy for me to say, but I think that Walmart has to work under the premise that if its stores are more effective and its people are more engaged, sales and profits will go up, and Wall Street will respond accordingly. It may take time, but I firmly believe that this is the best way for Walmart to proceed. Maybe the only way that is sustainable long-term.