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OM in the News: Walmart’s New Approach to Increasing Productivity–Pay Employees More

October 16, 2016
A Walmart trainee perfecting a cereal display in Fayetteville, Ark.

A Walmart trainee perfecting a cereal display.

“WalMart is discovering that, sometimes it is in an employer’s best interest to pay more than necessary to get a worker into a job,” reports The New York Times (Oct.16, 2016). The 18th-century economist, Adam Smith, described the need to pay a goldsmith particularly well to dissuade him from stealing from you. More recently, economists have found evidence that people are more productive when they are paid above the market rate. An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up.

There is evidence of this in practice. Higher pay at New Jersey police departments, for example, led to better rates of clearing cases. At the San Francisco airport, higher pay led to shorter lines for passengers. Among British home care providers, higher pay meant less oversight was needed.

Why a change of heart at Walmart? Because just a few years ago, shoppers were fed up. They complained of dirty bathrooms, empty shelves, endless checkout lines and impossible-to-find employees. Only 16% of stores were meeting the company’s customer service goals. Sales fell for 5 straight quarters, and shareholders were screaming.  As an efficient, multinational selling machine, the company had a reputation for treating employee pay as a cost to be minimized. So Walmart turned to the idea of “efficiency wages,” namely, pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.

First Walmart planned 200 training centers to offer a clearer path for hourly employees who want to get on the higher-paying management track. Then it raised its hourly pay to a minimum of $10 for workers, and to $15 an hour (from $12) for department managers. Third, it offered more flexible and predictable schedules to workers. Average pay for a nonmanagerial employee is now $13.69 an hour, up 16% since 2014. The results: this year, the proportion of stores hitting their targeted customer-service ratings has rebounded to 75%. Sales are rising again.

Classroom discussion questions:

  1. Discuss the pros and cons of efficiency wages.
  2. What impact will Walmart’s changes have on the entire retail industry?
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One Comment leave one →
  1. October 18, 2016 2:03 am

    This very thoughtful comment comes from a former MBA student of mine, who is now a professor in Montana. He writes: “The term ‘efficiency wages’ was conceived in a study (authored by economist Janet Yellen, among others) that attempted to explain the reason for persistently high levels of unemployment, not increased productivity. Not surprising considering the NY Times is the source of the article, they rarely get economic terminology correct in my opinion (or they politicize it).”

    “Further, I am concerned that the article is yet another misguided attempt, along with the endless quotation of the seriously flawed Card-Krueger study, to beat the drum for higher minimum wages. Or, more precisely, the notion that higher minimum wages don’t produce unemployment. I don’t see this is a substitute for the ultimate increase in productivity long term, especially in response to minimum wages that are perceived to be above productivity – the substitute of capitol for labor. Ok granted, it may be working for WalMart at this time, but that does not mean it will work for the entire economy, or it won’t lead to replacement of labor in the future- technological advances continue to amaze me.”

    “Perhaps it would be helpful to consider that this practice embraced by WalMart may work best in lines of work where the substitution of capital for labor does not work so well, or is even possible. Unfortunately, I don’t have a lot of faith in populist economic journalism to make these important and critical distinctions. That a “one size fits all” solution of a mandatory minimum wage is like using a sledge hammer where a more precise tool is clearly required to anyone who understands anything about business and economics.”

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