Wal-Mart (NYSE:WMT) is a great company. It demonstrated excellence in operations over the span of decades. By cutting prices and surviving on thinner margins, the company was able to gain enormous scale. Following its growth, the company announced increases in wages. The expectation for higher wages to hurt profits sent share prices into a steep dive. However, the share price recovered nicely so far in 2016.
A Better Plan
As a shareholder in Wal-Mart, I believe it is making the right choice. I believe longer employee retention periods and stronger applicants will improve the company's performance. There is one thing I wish it would consider though.
Have You Been to Wal-Mart?
This is a legitimate question. I know some readers won't shop at Wal-Mart, but I visit the local Sam's club 2 to 3 times per month. I visit the main Wal-Mart stores less frequently, but the story is the same. When you're checking out, do you simply look for the shortest line? That isn't the most efficient strategy. The best strategy is to scan how fast each employee is checking the items. The length of the line (even accounting for items per customer) is often less useful than the speed of the employee.
How To Fix The Problem
Rather than raising the base wage for all employees, including cashiers, I believe Wal-Mart should introduce commissions. Internal metrics should already be available that provide the average sales per cashier. Using that data, Wal-Mart can provide an alternative compensation structure.
How do you do it? Let us say, hypothetically, that the average cashier processes $5,000 in sales per hour worked. Wal-Mart can guarantee $10 per hour worked, but offer employees the better of either their base pay or receiving $8/hour + .04% of sales. The comparison can reset each week. The .04% of sales would add an extra $2. For the average employee, this would be about $10/hour. For the employee that doubles the average, it would be $12/hour.
Why not put the entire amount of the wage on commission?
The problem with offering 100% commission is that it creates a conflict. The worker needs to escape any time management would have "wasted" by asking them to perform a different activity. By keeping a base wage in place and then offering the opportunity to increase it through strong performance on sales, each hour spent working is still useful. Even if the employee knows they are getting the commission rate, they still get $8/hour as a base. On pure commission, they would not want to be present for a "slow shift."
Does it Work?
The workers need to present for their shift anyway. The question is simply whether they believe it is worth moving quickly. The standard economic system is simple. The company pays the least it can without causing the employee to quit. The employee works the least they can without losing the job. That is a terrible system.
Investors wondering whether this system works need look no further than the articles they are reading. The disclosure on this article states the base rate and the pay per page view. The combination encourages authors to write about things that interest them, because the base rate ensures the article won't be a complete waste. The inclusion of "per page view" metrics encourages authors to put a higher value on producing things other people will read.
What is the Goal?
The idea for Wal-Mart with this system is to identify and retain the people that are both willing and able to excel. It wants the checkers that can double or in some cases triple the average. That it is entirely possible if the checker understands how to deal with routine problems and moves rapidly during their shift. A worker tripling the average would be paid $14/hour. That is not much to most people reading this article, but it is dramatically better than $8 to $10. This system would offer a reward of 20% to 40% in additional pay to workers who were doing the work of multiple people.
When management can bring in 3 "star" employees rather than 6 people that don't care, the pay would drop to $36/hour ($12 per person) compared to $60/hour ($10 per person). However, it also reduces employee turnover costs and employee benefits.
Is Wal-Mart A Solid Buy?
I'm a shareholder and feel confident in my position. I still consider Wal-Mart a buy. It trades at a low P/E ratio, have very sustainable earnings, and trade at very low EV/EBITDA levels. I see Wal-Mart as a typical buy it and forget it stock. The dividend is solid. Both earnings and free cash flows are more than sufficient.
I would love to see Wal-Mart expand on its initiative to increase pay by structuring the system in a way that rewards top performers. To see the difference in effort, an investor need only walk through several stores and check on the work employees are doing. When Wal-Mart does its hiring, it will do its best to identify the best candidates. For better or worse, it doesn't always work out. Adding a commission structure to the cashiering job would be one way to improve the retention of the best employees.
Disclosure: I am/we are long WMT.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. This article is prepared solely for publication on Seeking Alpha and any reproduction of it on other sites is unauthorized. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.