An employee arranges beauty product gift boxes displayed for sale at a Wal-Mart Stores Inc. location ahead of Black Friday in Los Angeles. Bloomberg News
Announcing its decision to raise wages for its lowest-paid workers. Wal-Mart Stores Inc.’s chief executive quoted company founder Sam Walton, stating that “our people make the difference.”
Other statements by company executives Thursday were more explicit: the retailer has realized that staff turnover was hurting its business, and it is willing to spend $1 billion this year on higher pay and more career opportunities to keep store workers in their jobs.
“You got to ensure that your associates are retained, you have to take into account turnover, and you have to take into account their engagement. It’s part of the puzzle,” U.S. CEO Greg Foran said on a conference call. All of that, he noted, will help the company “lean in and improve the store experience for our customers.”
Put simply, Wal-Mart knows that shopping in its stores can be frustrating when staff can’t answer shoppers’ questions or don’t care enough to make the experience pleasant. A year ago, Gap Inc. raised pay for its hourly workers in part to keep skilled, motivated workers on its retail floors.
A large body of research—some conducted decades ago by current Federal Reserve chairwoman Janet Yellen —suggests that raising wages leads to lower employee turnover and better customer service, which generally correlate with higher sales and lower expenses.
Stemming turnover, in particular, can save companies a lot of money. Turnover is a special scourge of retail and service companies where wages are low and hourly workers are often viewed as disposable and interchangeable. Turnover in retail averaged around 66% for part-time hourly sales associates in 2014,
according to the Hay Group, a management consulting firm. For full-timers, who are more likely to be tethered to a company with benefits like health insurance, turnover was 27%.
A 2003 paper by University of California economists who studied the impact of living-wage policies implemented at San Francisco’s airport discovered that turnover dropped by about one-third among airport employers:
Turnover fell by an average of 34% among all surveyed firms and 60% among firms that experienced average wage increases of 10% or more. The greatest reduction in turnover occurred among airport-security screeners, from 94.7% a year in April 2000 to 18.7% fifteen months later, an 80% decrease. Cabin-cleaning firms reported a 44% reduction in turnover, and ramp workers a 25% reduction.
The authors concluded that employers pay about $4,275 in turnover costs every time a worker is replaced, and that SFO’s reductions saved firms roughly $6.6 million each year, offsetting the cost of the pay increase, which totaled about $42.7 million in wages, taxes and benefits.
Using the study’s (admittedly outdated) numbers, if Wal-Mart has 50% turnover among associates and logs a similar 34% decline in quitting among the 500,000 workers who will receive bigger paychecks, the retailer would save more than $350 million. So while the pay raise and related programs will cost $1 billion, Wal-Mart could earn back a big portion of that in lower HR expenses.
Another study. this one from 2005 and focused on low-wage workers whose pay was bumped up after a living-wage ordinance in Los Angeles, found that affected employers had turnover rates of 32%, compared with 49% at companies not bound by the rule. Thanks to lower turnover, the living-wage companies recovered about 16% of the payroll increases they incurred as a result of the rule.