Wal-Mart Stores Inc. Chief Executive Officer Doug McMillon helped set the stage for this week’s $1 billion pay increase almost a year ago in Orlando, Florida, when he rallied managers to reverse a slide in customer service.
It was only a few weeks after McMillon took the CEO job, and he made it clear that improving service would be a key piece of his agenda -- even if it meant higher labor costs. At the company’s annual Year Beginning Meeting, held last March, he and other executives laid out a plan to add employees hours in a bid to boost “in-store execution.” Store shelves needed to be better stocked with merchandise and resolving that matter was presented as a $3 billion opportunity.
McMillon made surprise visits to Wal-Mart stores and didn’t like what he saw: long checkout lines, empty shelves and problems with produce. Over the past 11 months, Wal-Mart has increasingly linked worker pay with the notion of improving the store experience for customers. By October, McMillon made the strongest indication that wage hikes were coming. He vowed to stop paying any of his workers minimum wage.
“Retail has been a people business and retail will be a people business,” he said at the time. “How a customer gets treated matters.”
The push culminated in an Wal-Mart’s announcement Thursday that it was raising wages for 500,000 of its workers, with the goal of retaining better employees and making them more productive in their jobs. The move will increase hourly pay to at least $9 by April and $10 by next February.
Wal-Mart, based in Bentonville, Arkansas, is taking the step as part of a broader campaign to better train, schedule and compensate workers. It’s been a collaborative effort by McMillon and Wal-Mart’s U.S. CEO Greg Foran, a New Zealander who took his current position after running the retailer’s Asian operations.
Foran warned in November that striving for higher customer service would ultimately come at a cost.
“We’ll continue to see pressures to the bottom-line as we balance wage leverage with higher customer service standards,” he said. “We have opportunities to improve the business, but we also know that these things will take time to ensure that they are executed properly.”
At the same time, Wal-Mart faced mounting criticism for not paying workers enough and was grappling with brief strikes at its stores. A few years ago, a walkout at Wal-Mart was uncommon. But by the holiday season of 2014, activists had begun holding such events regularly -- including one during Black Friday.
Wal-Mart also drew flak in October for cutting medical benefits to about 30,000 workers, a response to mounting heath-care costs and the growth of alternatives available under Obamacare. The retailer no longer provides health coverage to employees who work less than 30 hours a week.
Labor activists also seized on the appointment of Yahoo! Inc. CEO Marissa Mayer to Wal-Mart’s board in 2012. She was seen as a potential pressure point for the labor issue, and groups urged her to promote higher wages at Wal-Mart.
After Thursday’s announcement, Mayer said she was proud of Wal-Mart’s management and that the board had been “very supportive” of the idea.
“I’m particularly proud of Doug, obviously now about a year into his tenure there,” she said at a Yahoo conference in San Francisco. “It was a very bold move.”
President Barack Obama’s administration also had “a number of conversations” with Wal-Mart executives on the topic, according to a White House official. Valerie Jarrett, senior adviser to the president, encouraged Wal-Mart executives to act in a meeting in Arkansas several months ago, said the official, who asked not to be named because the talks were private.
McMillon, who became CEO in February 2014 after a three-decade career at the company, took an egalitarian tone in announcing the pay raises to employees on Thursday morning. McMillon began his own Wal-Mart career as a summer worker in 1984 at a distribution center.
“We’re all associates,” the 48-year-old said in an memo that was posted online. “Today’s cashiers will be tomorrow’s store or club managers. Today’s managers are tomorrow’s vice presidents. Tomorrow’s CEO will almost definitely come from inside our company.”
Department managers are also getting a bump, with starting wages for some of the positions going to $13 an hour this summer and $15 next year.
While the pay raises were seen as a victory by labor groups, investors were less enthusiastic. The extra labor costs, coupled with currency headwinds, will weigh on Wal-Mart’s profit this year. The announcement sent the shares down 3.2 percent to $83.52, the biggest one-day decline in four months.
Ultimately, the higher compensation will yield benefits for McMillon and Wal-Mart, said Brian Yarbrough, an analyst at Edward Jones in St. Louis.
“There will be less turnover, better morale, lower future training costs,” he said. “It’s the right thing to do to reinvest in labor to drive better customer service. But that takes time.”