For Big Business, Paying Minimum Wage May Not Pay Off

CHICAGO, IL - MAY 15:  Fast food workers and activists demonstrate outside McDonald's downtown flagship restaurant on May 15, 2014 in Chicago, Illinois. The demonstration was one of several nationwide calling for wages of $15 per hour and better working conditions for fast food workers. | Photo by Scott Olson/Getty Images

Scott Olson/Getty Images

Can increasing a business’s expenses actually lead to greater profits and ultimately growth? That’s to say, if you’re a business owner, would you actively look for ways to increase your expenses, hoping — gambling, maybe — that it will pay off in the end? Most businesses would be hesitant, which is why many companies resist things like wage hikes, but a few big businesses have started looking at the situation differently. Instead of an expense, companies are thinking about payroll as an investment.

In an article from The Huffington Post, one company’s CEO claims that his strategy for finding success is by paying his employees more. Kip Tindell, CEO of The Container Store (which sells exactly what you might suspect), says that he pays his employees considerably more than other retail companies — up to twice as much. The Container Store pays its retail workers, on average, $50,000 per year, whereas the average for the entire industry in 2012 was just $21,410, according to the U.S. Bureau of Labor Statistics.

“Paying great people well is not an altruistic benefit or sacrifice — it’s a profit strategy,” Tindell told The Huffington Post. “It’s a strategy that leads to higher corporate performance for all of the stakeholders.”

Naturally, this tends to go against everything that most people in management positions would traditionally think. And that kind of conditioning is one of the obstacles that Tindell has found blocking growth in even his own organization.

“One of the hardest things to do is to get managers, even in this company, to pay really great people well,” Tindell says. “They always think they’re helping the company by paying them less. There’s a sort of safety in paying somebody less. It takes bravery to pay somebody more.”

Source: The Container Store

Source: The Container Store

Tindell does pay more. Considerably more. Fifty thousand dollars per year for retail employees? That’s 57% above average. How many businesses can you think of that pay employees 57% above average wages and manage to survive? The Container Store is doing it, although the company hasn’t exactly exploded since it went public in 2013. But analysts are expecting a rebound.

The Container Store isn’t the only company that is raising wages as a profit strategy, either.

Two other high-profile companies that have decided to buck paying their employees minimum wage and instead celebrate workers as assets rather than liabilities are also in the retail sector: Ikea and Costco.

Ikea made the decision to raise the minimum hourly rate it pays all of its U.S.-based retail employees by 17%. On average, that bumps employee pay up by $1.59 per hour, or to $10.76. While it’s not nearly as lucrative as a the compensation being doled out by The Container Store, it’s still significant step for such a large company that will likely see its expenses grow by a huge amount as a result. The other big caveat in the announcement was that the company would not be raising prices, and would instead absorb the increases internally. The Wall Street Journal reports that Ikea plans to have 41 operating locations within the United States by the end of 2014, and all of them will employ the new pay scale.

While Ikea is on the cusp of trying out its new experiment, Costco has been using a vastly different strategy from its retail counterparts for years. Behind that strategy, Costco has become the country’s second-largest retailer, all the while paying an average of $21 per hour to its workers. In comparison, Wal-Mart, the country’s retail king, pays $12.67 per hour on average, reports Bloomberg Businessweek.

“I knew Costco employees were paid more and it shows in their attitude and customer service,” Jonelle Gilden, a Chicago training consultant, told USA Today. “Costco’s business model obviously works and their employees are loyal.” Loyal is the correct way to describe it: The company has employee turnover of less than 6% annually.

Source: Darren Hauck/Getty Images

Source: Darren Hauck/Getty Images

What Gilden points out — Costco’s business model — does seem to be the genesis of the company’s success. It’s also likely the same vein that The Container Store’s Tindell is trying to tap, although his company is still struggling to gain traction. Ikea, although tagging significantly behind, is still on the bandwagon. If these huge retailers are willing to adopt a more employee-centric mentality into their business strategy, then there must be something to it, right?

Well, it’s obvious that some companies have been able to become monstrously successful by strategically using the minimum wage to its advantage. The most obvious example, particularly in the retail sector, is Walmart, the country’s largest private employer. Walmart has become notorious in the eyes of the public for doing almost anything it can to squeeze the most out of its employees. The company gets a lot of flack in the media and from labor groups — many time deservedly so — for contributing to a cycle of poverty and worsening inequality.

A National Bureau of Economic Research study says that Walmart cashiers are paid $8.48 per hour on average. That  is significantly lower than the national average of $11.22 per hour for cashiers, as The Wall Street Journal reports. For all hourly workers, Walmart says that the average hourly earnings come up to $11.81 per hour. Now, compare that to what employees of The Container Store are making, and it’s clear that there are some drastically different business strategies at work.

Has Walmart’s strategy helped them become a successful company? Without a doubt. But the company’s reliance on cheap, low-wage labor is likely also a hindrance in other ways. The costs in both time and money spent recruiting, training, and maintaining its workforce are probably very high, and the company also takes a hit in public perception as a result — which does have some ultimate effect on the bottom line. And there are also the legal issues that the company is forced to take on as a result of its practices.

One such suit, Braun/Hummel vs. Wal-Mart Stores, Inc., was first filed more than a decade ago as company employees claimed they were not fully compensated. “The plaintiffs allege that the Company failed to pay class members for all hours worked and prevented class members from taking their full meal and rest breaks,” a Walmart company report reads on the matter. “On October 13, 2006, a jury awarded back-pay damages
to the plaintiffs of approximately $78 million on their claims for off-the clock work and missed rest breaks.” The issue has yet to be settled, but this is hardly the only lawsuit the company has faced regarding its relationship with employees.

But that’s just another one of the costs associated with the strategy Walmart employs. Does it make for a profitable business? For sure. Could Walmart possibly become even more profitable by simply paying its employees more, while reducing turnover, lawsuits, and improving its public image? It seems like it could. But other companies are proving that doing the opposite can be a successful plan of attack as well.

Perhaps a simple move like a pay raise can help turn around an entire corporate culture. It certainly helps in retaining and keeping loyalty among the employee ranks. If The Container Store and Ikea both successfully adopt a strategy closer to that of Costco’s, will the rest of the industry follow suit? It looks like there’s something to the idea, but how well it can remain successful for the long term or if it is merely a fluke has yet to be seen.

 More from Business Cheat Sheet: