OM in the News: Walmart’s New Approach to Increasing Productivity–Pay Employees More
“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:
- Discuss the pros and cons of efficiency wages.
- What impact will Walmart’s changes have on the entire retail industry?