Wal-Mart Stores, Inc. Case Study: An Assessment of the Relationship Between Wages and Employee Motivation

Wal-Mart Stores, Inc., knows as Wal-Mart, is the largest retailer in the world. The company owes its success to its cost leadership strategy that prioritizes offering the lowest prices to consumers. Because of its vast economies of scale and efficient inventory management system, the company has been able to efficiently cut its operational costs and pass these savings to the consumer through reduced prices on merchandise. However, in its commitment to cutting costs in all areas, the company has gained a negative reputation for providing low compensation to employees. Functional-level employees especially bear the brunt of Wal-Mart’s low wage strategy as they face reduced shift hours and low starting wages that make it difficult to meet their living expenses. This case study will evaluate the controversy surrounding Wal-Mart and its relationship with its employees. As this study will demonstrate, human resource practices regarding compensation have a direct impact on organizational behavior. While Wal-Mart traditionally views increased wages as a threat to its competitive cost leadership strategy, the organization must increase the compensation of its employees in order to boost organizational morale, sustain employee motivation, and attract and retain talented employees.

An Evaluation of the Relationship Between Wages and Employee Motivation

As one of the largest employers in the United States, the hiring practices of Wal-Mart have gained significant scrutiny. Currently, the company employs 2.2 million associates globally, with 1.3 million of its labor force coming from the United States (Our Business, 2014). Because the company relies upon the loyalty and commitment of so many individuals, the treatment of employees plays a critical role in determining the long-term viability of the company. Acknowledging the key role that its associates play in driving the company asserted its 2013 Annual Report that investing in its associates and recruiting “energetic and capable leaders” was among its top priorities (Walmart 2013 Annual Report, 2013, p. 6). Further, the company marvels at the positive work environment that it provides for its associates. For example, in his letter to investors, CEO Michael T. Duke wrote:

Nothing makes me prouder of Walmart than when I hear about the opportunity we provide to our associates. It’s amazing to think that in our Walmart U.S. business, approximately 75 percent of our store operations management started their careers as hourly associates (2013, p. 3). As Duke conveys, the company’s treatment of employees is critical to the company’s image, boosting employee morale, and enhancing company performance.

As a large-scale company, Wal-Mart has had many successes in recruiting and maintaining motivated employees. Ten years ago, Harris and Kleiner (1993) identified several motivational tools that were successfully adopted by Wal-Mart. As they noted, Dun’s Business Month ranked Wal-Mart as one of the five best-managed companies in the United States because of its commitment to the employee experience. They noted that founder Sam Walton preferred to remain on a first-name basis with over one-hundred employees and that the company sought an organizational structure based upon closer relationships between upper management and store employees (1993, p. 1). Further, under Walton’s lead, the company sought to boost employee motivation through stock option plans, profit-sharing trusts, and an open-door policy between employees and managers (1993, p. 1). This employee-focused approach is among the organizational factors that are attributed to the company’s strong performance during the latter half of the twentieth century.

However, recent controversy regarding employees’ wages exploitation highlights a conflict that has emerged between the company’s competitive strategy and its commitment to employee morale. The emphasis on providing low prices has dominated the Wal-Mart culture. As Wal-Mart noted in a statement to shareholders, the company’s primary priority is to “fortify” its low-cost culture by implementing an Everyday Low Price (EDLP) focus (Walmart 2013 Annual Report, 2013, p. 5). The EDLP focus is the foundation of a strategy that based upon offering the lowest prices on baskets of merchandise that consumers typically seek to purchase, such as grocery items or electronic goods (2013, p. 5). Yet, as critics of the company assert, the focus on cutting costs at every angle in order to provide low-price goods to consumers comes at the expense of employees.

While Wal-Mart has often been presented as a model employer, dissent from its employees presents a different picture. In 2013, workers asserted that the company manipulated its scheduling to prevent providing employees with full-time hours, provided a wage that was below the minimum wage, and failed to provide improved working conditions for employees (Wolf, 2013, p. 15). Analysts disagree on the merits of the complaints that are often levied against Wal-Mart. Yet as one report assesses, the average Wal-Mart employee makes $11.75 per hour, which averages $20,744 per year (Blodget, H., 2010). As supporters of the company note, these wages are above the minimum wage and comparable with wages offered by other retailers (2010). Yet, in consideration of the complaints that the company prevents employees from obtaining full-time work, these wages often keep the earnings of employees below the poverty line.

The impact of reduced earnings for employees can be understood in relation to theories on motivation. As Harris and Kleiner assess, Maslow’s hierarchy of needs and Herzberg’s two-factor theory are the dominant motivational theories that inform organizational decisions. According to Maslow’s theory, there are five levels of human need that relate to physical needs, safety, social needs, self-esteem, and self-actualization (1993, p. 1). Herzberg's two-factor theory addresses how maintenance factors and motivational factors impact morale (1993, p. 1). Maintenance factors include company policies, salary and job security while motivational factors include achievement, recognition and advancement (1993, p. 1). What is significant about both theories is that they would posit that employee compensation is foundational for employee morale. As Maslow notes, when employees cannot meet their physical needs through their salaries, other aspects of their well being become less of a priority. As Hertzberg notes, an adequate salary is a basic maintenance factor that should be considered separately from motivational factors.

A 1995 Wall Street Journal report confirms the assessments of both Maslow and Hertzberg. While the company was initially successful in motivating employees through motivational factors, such as providing recognition and offering opportunities for advancement, the reduction of compensation created tension within the organization. As the article asserts, when Sam Walton stepped down, the company reduced pension plans, increased the healthcare contributions of employees and experienced a decline in the value of its stock option plan during the latter portion of the 1990s (Ortega, 1995). As a result, employee dissent increased and calls for unionization among employees emerged (1995). As the rise in dissent among Wal-Mart employees demonstrates, the theories of Maslow and Hertzberg are correct regarding the fundamental role that compensation plays in employee morale. Before additional psychological motivators can be pursued, a company must offer wages that enable employees to meet their physical needs.

Wal-Mart SWOT Analysis

Wal-Mart is an American-based retail giant that operates retail stores across the globe. The company originated as a discount retail store from Arkansas and expanded into a multinational corporation that operates 11,000 retail units in 27 countries (Our Business, 2014). Though the previously addressed research highlights the benefits that improved wages would have on the motivation of employees, strategic considerations must be made before pursuing wage increases for functional-level employees. This SWOT will consider the strengths, weaknesses, opportunities, and threats that Wal-Mart faces in securing and leveraging its competitive advantage. It will also address how these factors impact the feasibility of pursuing wage increases as a means of improving organizational morale.

Strengths

The first strength Wal-Mart possesses is its size. As a leading retail chain, Wal-Mart has several strengths that lend to its overall success. First, as the largest retailer in the world, Wal-Mart is a market leader that possesses superior economies of scale and product assortment (MarketLine, 2014, p. 4). Wal-Mart is able to reach across several markets by providing a wide range of consumer goods in its retail stores. For example, the average Wal-Mart superstore offers groceries, entertainment goods, health and wellness products, clothing, and home items (2014, p. 4). Through economies of scale, the company is able to efficiently compete with retailers that solely specialize in any one of these categories. Also, by virtue of its leadership position in the retail market and across several market segments, efforts by competitors or market entrants to encroach upon the company’s market share is a formidable task.

The second strength Wal-Mart possesses is its strong brand recognition. As one of the largest retailers in the world, the Wal-Mart brand is well known by consumers. A 2013 list released by an industry brand valuation expert positions Wal-Mart among the top five in its list of the 100 most valued global brands (2014, p. 4). Additionally, Wal-Mart is a mainstay in the United States. Industry experts established that in 2013, Wal-Mart was among the top three in a list of fifty retail brands in the United States (2014, p. 4). Strong brand recognition also enables Wal-Mart to sustain its position as a market leader.

The third strength Wal-Mart possesses is its success as a price leader. Wal-Mart utilizes a cost leadership strategy that centers or reducing its operations costs (2014, p. 5). Further, Wal-Mart offers a lower-priced basket of consumer goods in order to pressure its competitors to offer similar prices (2014, p. 5). The relationship between Wal-Mart and its suppliers is critical to the company’s low-cost strategy. In order to effectively utilize just-in-time inventory management systems, Wal-Mart requires suppliers to synchronize with the company’s system (2014, 5). Through superior inventory management, the company is able to cut costs by delivering items to the store in an efficient manner that reflects the demands of consumers. Even while online retailers threaten traditional stores, Wal-Mart is able to remain competitive through its cost leadership strategy. For example, a study that considered the price of 59 brand items determined that Wal-Mart provided lower prices than online retail competitor Amazon (2014, p. 5). Through its aggressive cost leadership strategy, Wal-Mart has been able to expand its market share by enabling consumers to increase their consumption of Wal-Mart products.

Finally, the company is pursuing an international strategy that will ensure its growth in the long run. In the past year, expanding to international markets has been a core component of Wal-Mart’s competitive strategy. In the 2013 fiscal year, Wal-Mart International reported $135 billion in net sales, a 7.4 percent increase from the previous fiscal year (Walmart 2013 Annual Report, 2013, p. 14). While the sales of Wal-Mart International was only half of the reported sales for Walmart U.S., Wal-Mart International received twice the growth in sales over the previous year (2013, p. 14). Further, Wal-Mart expresses its intention to expand to high growth markets. In 2013, Wal-Mart expanded upon and initiated expansions in the United Kingdom, Brazil, China, and international e-commerce markets that targeted consumers outside of the United States (2013, p. 26). As evidenced by the growth of Wal-Mart’s sales in international markets, the company should expect strong performance through its appeal to consumers abroad.

Weaknesses

While Wal-Mart possesses an impressive array of strengths, the company must be mindful of key internal weaknesses. The primary weakness that Wal-Mart possesses is its adverse relations with its employees. Besides impacting employee and organizational morale, the contentious relationship between Wal-Mart and its employees has financial costs. In the fiscal year 2009, Wal-Mart paid $640 million in the settlement of sixty-three class-action lawsuits related to wage disputes (MarketLine, 2014, p. 7). The 2009 lawsuits were not an isolated event for the company. Between 2005 and 2011, Wal-Mart settled approximately seventy class action lawsuits at both the state and federal levels regarding wages, costing the company over $1 billion (2014, p. 7). Besides costing the company financially, these suits serve to tarnish the image of the brand and reduce the ability of the company to attract the best employees.

The second weakness that Wal-Mart possesses is its implications in unethical organizational structure and illegal activities. In 2012, it was asserted that Wal-Mart offered the Mexican government $24 million in bribes in order to secure construction permits (2014, p. 7). Further, the US Department of Justice and Securities and Exchange Commission instigated investigations regarding allegations of corrupt business practices conducted by Wal-Mart abroad (2014, p. 8). Like its contentious relationship with employees, the allegations of corruption come with financial consequences. In 2012, the company’s expenses in connection to these investigations totaled over $140 million (2014, p. 8). In addition to warranting legal sanctions that could inhibit the company’s future growth, these allegations of wrongdoing also serve the effect of tarnishing the company’s brand image.

Opportunities

Emerging markets serve as the primary growth opportunity for Wal-Mart. The company has capitalized on increased consumer activity in emerging markets by expanding its operations to Brazil, India, and China (2014, p. 8). According to updated statistics, retail sales in Brazil increased by 4 percent in 2013 and 13 percent in China (2014, p. 8). Further, the retail market in India is estimated to exceed $1 trillion dollars by 2020, up from $500 billion in 2013 (2014, p. 8). Strong economic growth in these markets is expected to grow in increased consumer spending, which will benefit Wal-Mart significantly in the future.

The expansion of Internet retailing serves as a second opportunity for Wal-Mart. According to the United States Department of Commerce, domestic online retail sales increased from $142.6 billion to $224.4 billion between 2009 and 2012 (2014, p. 9). Growth in online retail sales is also strong overseas. According to estimates, the Chinese online retail market exceeded $200 billion, growing by 70 percent from 2009 (2014, p. 9). Wal-Mart’s expanded online presence should enable it to capitalize on these increases in online spending both domestically and globally.

Threats

The main threat that Wal-Mart faces is that it operates in a highly competitive environment. As the company notes in its annual report, it faces sales competition from discount stores, drug stores, dollar stores, warehouse clubs, and supermarkets that have national, regional, or international appeal (Walmart 2013 Annual Report, 2013, p. 19). In addition to facing competition from other retail stores, there are industry-wide threats that Wal-Mart is also exposed to. As the company acknowledges, economic conditions, the cost of goods, the disposable income of consumers, tax rates, and inflation are among the external conditions that impact all retail companies, including Wal-Mart (2013, p. 19). Thus, the competitive and vulnerable nature of the retail industry threatens the company’s ability to maintain its market position.

Second, the instability of foreign currencies poses a threat to the company. As Wal-Mart attempts to focus on international strategy as its primary strategy, it depends on stable exchange rates in order to obtain stable loans and attract investors (2013, p. 29). As the company notes, it holds currency swaps to hedge its investments that are valued at $453 million (2013, p. 29). Yet, the company notes that a 10 percent decrease in the currency exchange rates would result in a loss of $241 million for the company (2013, p. 29). Thus, the health of global currency markets is key to the health of the company’s overall investment strategies.

Finally, environmental factors that impact the company’s JIT inventory system can negatively impact company performance. As Wal-Mart states, it utilizes a “last-in, first-out” (LIFO) inventory system to obtain cost savings (2013, p. 29). The benefit of LIFO is that the company can save on the price of purchasing facilities to warehouse unused inventory. Further, the company is able to respond to the demand of consumers by ensuring that in-demand inventory items are always in stock and available for purchase. However, natural disasters, technological glitches, and miscommunication between suppliers and operations are among the external threats that can adversely impact the performance of LIFO.

Discussion and Conclusion

In order to improve the motivation of employees and organizational morale, Wal-Mart must address the compensation of its employees. Though the wages offered by Wal-Mart range from average to above average, research reveals that the wages received by a full-time associate place an employee below the poverty level. Further, complaints from employees allege that the company engages in practices that prevent employees from earning full-time wages while compensation packages that continue to increase in value. As an assessment of Maslow’s hierarchy of needs and Hertzberg’s two factors theory reveals, compensation is foundational to improving organizational morale. As Maslow posits, employees must be enabled to meet their basic physical needs before they can be motivated at the social level. According to Hertzberg, salary is a fundamental factor that should be considered separately from motivational factors. If an employee’s salary needs are unmet, it is unlikely that alternative motivational activities will be a suitable alternative.

However, a review of Wal-Mart’s corporate statements reveals a disconnect between motivational theory and the company’s practice. First, while the company prides itself on enabling companies to rise to management, Hertzberg assesses that the opportunity for advancement is an ineffective motivator if simple aspects of maintenance, such as providing adequate pay, are not met. Further, while the company wished to maintain its competitive advantage by attracting talented employees, its reputation for mistreating and underpaying its employees hinder this goal. Yet, the SWOT analysis provides several areas of opportunity in implementing beneficial organizational changes. Though JIT inventory is at the crux of Wal-Mart’s strategy of cost leadership, providing low wages is not necessarily the crux of the company’s strategy to drive down prices. Rather, it is the ability of the company to maintain economies of scale and expand to emerging markets that will contribute to the company’s future success. As the SWOT reveals, Wal-Mart can improve its compensation practices and focus on boosting morale while still maintaining its competitive advantage by focusing upon its strengths such as inventory efficiency and expansion to high growth markets.

References

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