Walmart’s cuts to worker compensation are self-defeating

Walmart is cutting worker compensation — again. The stealthy way the giant retailer is cutting pay for most of its 1.4 million American workers not only throws sand in the gears of the nation’s economic engine but also misleads investors by disguising the company’s weakening finances.

In the months ahead, other big companies will likely follow the same inefficient paths as Walmart, the nation’s largest employer, making its compensation policies at all levels especially worthy of scrutiny. 

Walmart’s decision to force harder times on its already poorly paid workers is intimately connected to two major trends in the U.S. economy, neither of which is good for America or Walmart investors.

The first trend: flat to falling incomes for the vast majority of Americans, especially the lower half who are Walmart’s customer base. Their meager pay translates into weak retail sales. The second trend: executive compensation plans that focus on short-term measures that separate the interests of executives from shareholders and work against building long-term value.

Both trends can be reversed, which would get our struggling economic engine humming smoothly again.

To understand the pay problems Walmart illustrates, let’s start with a company announcement from last week.

The retailing giant never said it was cutting compensation, which would be a PR disaster, given the campaigns to raise the minimum wage. Instead, company publicists told reporters that come 2015, it would raise health insurance premiums for its full-time workers by 20 percent and eliminate access to company health insurance for 30,000 workers who have insurance now but who clock less than 30 hours a week. And reporters, as they too often do, parroted the company’s statements without contextualizing them.

Walmart said it must take these actions because it expects health care costs to rise by $330 million above the $170 million increase it budgeted for in 2015. To put those numbers in perspective, $330 million is about a third of the company’s domestic revenue for a single day. Over a year it comes to less than 7 cents out of each $100 Walmart’s underpaid cashiers ring up.  

While that $330 million expense will disappear from the company’s books, it must be recorded somewhere on the universal ledger of America.

That $330 million will be borne primarily by Walmart’s workers, many of whom will finance the higher health insurance premiums by cutting back somewhere else, perhaps by skipping meals. Those who cannot squeeze another dollar from their budgets will drop their insurance, adding a new liability for taxpayers, if they become seriously ill or injured. Economists call the uninsured free riders. Some Walmart associates who lose or drop their health insurance will not seek treatment, their conditions going from curable to disabling or even fatal.

Walmart’s top five executives, of course, have no such worries. Their employment contracts describe them with the same word applied to stock clerks and cashiers: “associate.” But Walmart foots the bill for their annual physicals.  Their titles may be equal, but management and board concern for the well-being of associates is not.

A more tax-efficient and paperwork-efficient way to finance the unexpected increased cost of health care for the rank and file would be diverting a dime an hour from the next general pay raise for associates.

But that solution assumes Walmart gives its workers regular annual pay increases; it doesn’t. Since its workers have no union, they have no bargaining power. Given the millions still out of work, many of them college graduates, Walmart can easily replace workers who want more money with fresh hires, though hiring and training new workers who make less adds to inefficiency.

Walmart is far from alone in not granting general wage increases. So many other big companies let wages stagnate while demanding workers divert more of their wages to health insurance and copays that Walmart’s customers have less to spend, weakening the company’s bottom line.

With inflation taken into account, the average cash income of the bottom 90 percent of taxpayers was essentially the same in 2011 and 2012 as it was way back in 1966, when Lyndon Johnson was president. Worse, this vast majority’s average income in 2012, just under $31,000, was down from 2000 by $106 per week.

Newer data indicate the economy is growing, albeit slowly, but the growth is going to profits, not wages. 

The Walmart board’s compensation committee fails to take this core long-term problem of customers’ falling fortunes into account in setting rewards for top executives.

Walmart claims its executive pay policies align the interests of shareholders and executives. CEO Michael T. Duke retired this year with at least $140 million of company stock, after averaging about $20 million in each of his last three years at the helm. He owes his fortune not so much to the rising stock price that benefits all investors as to meeting a narrow target that can be manipulated with accounting tricks: operating income (profits before interest, depreciation and taxes). This measure includes wages, however, giving Walmart executives an incentive to hold down rank-and-file compensation.          

Over the last 10 years, Walmart’s stock price has grown only about two-thirds as much as the broad market, its debt-to-equity ratio worsened, and the return it earned on assets drifted downward. Profits grew only three-quarters as much as revenue. These are hardly exemplary marks for executive performance or a good sign of future profits.

Most troubling of all: Dividends grew 60 percent more than profits as founder Sam Walton’s heirs, who control half of all shares, stuffed their pockets.  

The lesson here is that paying big bucks for inferior executive performance is like cutting rank-and-file compensation by raising health insurance premiums: It’s inefficient, unfair and counterproductive to the long-term interests of shareholders. 

Walmart will get economically healthier only when its customers do. When Walmart squeezes its workers, other companies follow, creating a vicious downward spiral of shriveling incomes, stagnant demand and precarious workers.

If Walmart would change the incentives for its executives by basing performance pay on adding long-term shareholder value, the executives would in turn will have an interest in promoting better pay for low-wage workers, since better pay would affect other companies, translating into increased sales.

A primary tool to align CEOs and shareholders would be basing most bonuses and stock awards on real increases in same-store sales over 10 years. Until three years ago senior executive bonuses at Walmart depended partly on increasing same-store sales, which have been flat to falling. That policy still applies, however, to store-level workers eligible for bonuses.

Another tool would require departing executives to hold all their shares for five years after they resign or retire to encourage a focus on long-term added value.

If Walmart, the nation’s largest employer, adopted performance measures like these, its top executives would be at the forefront of insisting that workers share in America’s economic expansion by getting regular pay raises in a growing economy.