Walmart, the largest retailer in the world (Euromonitor,
2015), yesterday announced their plans to boost pay for an estimated 500,000 of
its U.S. employees to at least $10 an hour by next year (Walmart, 2015). This
figure is well above the federal minimum wage of US$7.25 (United States
Department of Labor, 2009). Walmart’s decision is said to represent a partial
victory for unions and employee groups, which have campaigned for a minimum
hourly rate of $15. One group, Our Walmart, organised a series of strikes on the
busiest shopping day of the year in November, arguing many of the company’s
workers lived in poverty and had to rely on food stamps to survive (Financial
Times, 2015). Nonetheless, investors reacted negatively to this announcement as
Walmart shares fell 3.21% by the close of New York trading. This is because the company
estimates that the change will cost $1bn and is expected to wipe 20 cents a share off earnings in
the fiscal year (Walmart, 2015).
Berle and Means (1932) were the first to observe and examine
the complications that arise from the separation of ownership and control back
in the 1930s. The separation between management and ownership is common
referred to in financial theory as agency theory or the principle and agent
problem, which may lead managers to maximise their own needs rather than that
of the firm. Jenson and Meckling (1976) whose work became key in the
development of agency theory, used the term agency cost to describe the
reduction in a firm’s value, which arises when managers fail to serve
shareholder interests. In the context of the Walmart, there appears to be a
trade-off between satisfying employee’s (by increasing their wages), at the
expense of shareholder wealth (lower dividend). This conflict of interests and
shareholder dissatisfaction is evident in the company share price on the day
that Walmart made the announcement.
Figure 1: Walmart's share price on the day of the announcement
Figure 1: Walmart's share price on the day of the announcement
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| Source: Yahoo finance (2015) |
So, was this a good decision by Walmart? Walmart is the
biggest private employer in America, so this will obviously bring joy to all of
their low paid workers. In addition, Walmart will be hoping to get plenty of
good press for this decision. Contrary to this, it’s worth examining the
decision less based on whether they deserve applause on some moral grounds and
more based on the economic forces that led them to act. Did Walmart simply
think that they will need to raise wages in the next couple of years anyway in
order to retain good workers and maximize profitability, so they may as well
get ‘ahead of the game’ and get a positive publicity out of it now? Nonetheless, investors seem to be struggling to understand the benefits (to
them) of this wage increase.
Overall, as the theory suggests, it is difficult to
determine whether this was a good decision by Walmart. Viewpoints on this announcement
vary significantly depending upon the perspective of the stakeholder. Clearly, this was good news for
employees, however shareholders have reacted negatively this. What I can
conclude is that the decision is unlikely to have a significant negative impact
on the firm in the long term. This is certainly
not a decision that will jeopardise Walmart’s competitive positioning and their
huge market presence both in America and across the globe. Would Walmart increase wages if they thought it could compromise the financial stability
of the firm? In my opinion, this would be highly unlikely.
References
Berle, A. A., & Means, G.
C. (1932). The modern corporation and private property. New York:
Macmillan.
Euromonitor (2015). Wal-Mart
Stores Inc in Retailing. Retrieved 20th February 2015, from https://www.portal.euromonitor.com/portal/analysis/tab
Financial Times (2015).Walmart
to raise pay of 500,000 employees. Retrieved 20th February 2015,
from http://www.ft.com/cms/s/0/1fdceba4-b83e-11e4-b6a5-00144feab7de.html#axzz3SHbqT7vE
Jensen, M. C.,
& Meckling, W. H. (1976). Theory of the firm: Managerial behavior,
agency costs and ownership structure. Journal of Financial Economics, 3(4),
305-360. doi:10.1016/0304-405X(76)90026-X
United States of America. United States Department of labor
wage and hour division (2009). Employee Rights under the Fair Labor Standards Act.
Retrieved from http://www.dol.gov/whd/regs/compliance/posters/minwage.pdf
Walmart (2015). Walmart
announces Q4 underlying EPS of $1.61 and additional strategic investments in
people & e-commerce; Walmart U.S. comp sales increased 1.5 percent.
Retrieved 20th February 2015, fromhttp://news.walmart.com/news-archive/investors/2015/02/19/walmart-announces-q4-underlying-eps-of-161-and-additional-strategic-investments-in-people-e-commerce-walmart-us-comp-sales-increased-15-percent
Yahoo finance (2015). Wal-Mart
Stores Inc: Historic Prices. Retrieved 20th February 2015, from https://uk.finance.yahoo.com/q/hp?s=WMT&b=15&a=01&c=2015&e=16&d=01&f=2015&g=d
