March 20, 2012
Higher Payroll Leads to Better Retail Results
Everyone connected to retailing knows that it’s a huge business. As the National Retail Federation has pointed out with its “Retail Means Jobs” campaign, the industry is the top source for private sector jobs in the U.S.
While the quantity of jobs is without dispute, there is also the reality that most of the positions within the industry are low-paying. The rationale for many companies within retailing is that they need to keep labor costs down to compete more effectively in the marketplace.
Research from a number or sources, however, is not only questioning conventional wisdom on retail pay, it is rejecting it. A report on The New Yorker website looks at research done in recent years that shows retailers that offer higher pay generate greater sales per square foot and per employee than their more frugal competitors. These businesses are also more profitable.
A study by Wharton researchers found that a retailer with more than 500 locations was able to increase new sales between $4 and $28 for every dollar spent in additional payroll. The reason behind the success was pretty straightforward. Having more people on staff meant that customers got their questions answered more quickly, products not on the shelf could be located while shoppers were in the store, and checkout times were faster — all factors in creating a more pleasurable shopping environment and higher rings.
Zeynep Ton, an M.I.T. professor, has published a number of research reports about the dividends paid when workers receive better compensation and employers invest in training. Companies such as Costco, Mercadona, QuikTrip and Trader Joe’s, she has pointed out, manage to have higher payrolls and still compete on price.
“You can invest in your people and offer low prices,” Prof. Ton told HBS Working Knowledge. “And guess what? You’ll have a service advantage too.”
Discussion Questions
Discussion Questions: Is there something wrong with the current labor compensation model at retail? If yes, how would you change it?
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While I encourage paying employees more than their competitors, it is a stretch I think to say paying more gets higher sales. Given an average employee making $8 hr, if I increase their pay to $14 an hour will I gain 50% more sales? Doubtful.
Corporate culture, product selection, training and narrow niche seem to be as big a factor as compensation. I mean really, Lou D’Ambrosio, CEO of Sears pulled in $10 million last year — clearly paying more doesn’t lead to better results.
Hallelujah. Finally, some sage advice that flies in the face of the continual online/mobile chants that the media sings daily.
Better pay rates attract and retain better staff. Proper floor coverage with properly trained and engaged staff actually provides the shopping experience that justifies the existence of the store.
Retail is about people. Always has been. Always will be. It’s time retailers put them on the top of their priority list.
Thanks George for posting this article.
While this would appear to be the classic chicken or egg debate, it also involves a third element — timing. If a retailer increases their payroll expenditures (including training), how much an increase in sales should they expect to see and when? The answer is, it depends.
For a retailer to change its corporate culture from seeing people as an expense to seeing them as an asset to invest in is something that take time. This lag between the investment and the payoff may prohibit doing so on a large scale, all at once. Because there is no formula to predict the timing, will the retailer have the patience to see it occur?
One of the companies mentioned by professor Ton is QuikTrip who has had a policy of investing in their people for many, many years. It is not something new and represents a fundamental aspect of their corporate culture.
I’ve said for years that the only people who believe that “money isn’t a motivator” are those that write the checks. If the current compensation model does not provide people with a livable wage, a fair number of people will find ways to “supplement” their income — through a second and/or third job and/or through theft.
Underpaying employees may help the bottom line but it doesn’t do wonders for such incidental areas as controlling training costs associated with high turnover, building employee loyalty, improving customer service (and therefore your brand) and, as I mentioned, controlling shrink. Paying better is no guarantee that people won’t steal or will give good service, of course, but not paying well is a formula for increasing “turnover” of both employees and inventory. Increasing payroll also means that the work is being shouldered by more people, reducing — at least in theory — the potential for burning out key employees.
Bottom line — viewing human beings as being an asset rather than a balance sheet liability is critical for retail success.
It is simple math at retail. There are way too many stores in retail today, and pressure on price with the bad economy is really killing profits right now. Labor is the first thing that we can control.
There are no easy answers to this because customers want super low prices and great service too. Ask for the impossible and let’s see who can deliver it. With few exceptions to the retail rule, most stores can not do both because the bottom line will not allow for higher wages without a drop in total hours inside the business to make up for it. Lots of fun being in business today. Add to that all the mandates from the government and you have a tough road to profitability.
The current compensation model in retail assumes most store employees are high schoolers, retirees, recent immigrants, or others who are not in a position to demand high-wage jobs and will probably not stick around long-term. For retailers whose value proposition is strictly low price and do not create expectations of high customer service levels, this model is okay. But retailers looking to create a superior customer environment have to pay higher wages to the floor associates who largely determine what kind of environment a store offers.
This is the ongoing battle between the HR department and the CFO. The first looks at payroll as an investment in the business, the second as an expense that needs to be controlled. The challenge is that, while you may or may not get the payback from increased wages, you can definitely lower expenses.
Whether you get the payback involves more than the wage rate. HBS published a big study years ago that looked at what motivated associates. Monetary compensation was way down the list, ranked below elements like working environment, what’s now referred to as empowerment, and recognition for a job well done. Paying a higher wage, in and of itself, will not get a payback unless these other elements are in place.
It’s a karma thing, or if you prefer, Newton’s Third Law of Motion. What you put out comes back to you, apparently multiplied by a significant factor.
Historically working the floor in retail has been way down that proverbial ladder. So right from the hiring a negative energy tends to be created. We add to that little training and to that we add almost minimum wage. In this forum we go over and over these issues apparently to no avail. Is retail predestined to be what you do while waiting for something meaningful and rewarding to come along? Kind of a career purgatory?
This research, taken at face value, tells us once again that the secret is to invest in people. They are not a cost center.
There are two ways to increase profits: cut costs and/or increase revenues. Cutting costs by decreasing what is paid in wages looks great on paper but it is important to consider what those employees do. If those employees are the face of the company to consumers, are the people who answer questions, create a friendly atmosphere, or offer knowledge, low paid workers do not necessarily do that well.
It is important to motivate and reward employees to do a good job. Finding the right balance to attract customers, keep them satisfied, and contain costs is important. Constantly cutting costs is not always the answer.
Adding people and raising the level of service can definitely lead to higher sales, lower shrink and a better overall experience for customers. But here’s the rub; they need to have something to do. It’s been proven time and again that adding warm bodies that say hello, goodbye and hover around the cash wrap will net no additional sales.
Before hiring the first sales associate, retailers should develop an in-store service strategy that reflects the service model of the store. If teaching associates to process inventory, markdowns, and ring sales is part of the job, great, but to increase sales they must be trained to interact effectively with each customer.
Associates need to be trained and compensated to guide customers through the buying process and answer their product questions which require time and money that most retailers are loath to invest.
This is one of those retail debates that seems to rage non-stop in an environment where the landscape continually changes — cost of labor, competitive wage rates, labor pool characteristics, customer expectations, etc. This is a complex challenge and retailers are constantly trying to “adjust the knobs” at the right level for their business.
I think the more interesting discussion is how technology can transform labor models so that customers can get more of what they want and retailers can afford to give it to them. For example using remote video interactions can improve both service AND a retailer’s labor ROI.
I have to agree with Bob here: many — or most — businesses have gravitated to a low price/low service model that allows, or even requires, low pay (except in the C-suite, of course!); hence (hope of) high profits > low service > low skill > low pay; arguing the reverse process (i.e. high pay > high skill > higher profits is a non-sequitur (at least without a change in the model used).
There is absolutely something wrong with the current labor compensation model at retail. The problem is that most retailers, faced with declining sales, reduce their variable expense by decreasing the number of store associates and, when possible, their compensation levels. The net impact of such changes is to reduce customer experience, and increase commoditization of their products and their channels.
Current data on customer experience shows that it has declined or remained stagnant over the past 10 years across retail. The data that indicates that improving compensation for store associates has an associated increase in revenue, provides the ROI story that demonstrates how illogical it is to reduce the element of retail that actually drives increased order value and customer retention. Note that this analysis only shows increase in revenue, not increase in customer retention or annual value; those metrics probably increase more than the actual change in short-term revenue demonstrated by the study.
By using Tyler markets, retailers can gain a sense of what the opportunity is to improve customer experience and how much that could be worth to the organization. The only requirement is an innovative mindset, willing to spend “into the wind” on a control basis and explore what the potential upside could be.
Retailers who value their employees by paying more and seeing them as assets rather than liabilities are often more enlightened and open to innovation everywhere. This can permeate other business behavior that benefits the company. I’ve seen this happen too often for it to be mere coincidence. In my career, some employers have seen me as a liability (despite the BS they spouted about how they valued all workers) and some saw me as an asset. When you are treated like an asset, you are more willing to take risks, innovate and feel part of a team. All that can help build sales and profits. But this can’t be just “paying more;” it has to be paying more as part of a fundamental belief system at the senior level. When that happens, and if the stars are all aligned properly, you can have magic.
The bottom line is that we are mostly discussing SELF-service businesses, whose foundation is customers serving themselves, not relying on retailer staff. There is more potential in learning how better to help shoppers help themselves, than to pay more staff, better, to serve them.
This is not to knock investing in the lean staff you have, but they do have to earn back that investment for the business, which requires smarter management of the resource, not simply greater pay.
Although I agree with Bob Phibbs, I know that when payroll is cut in FMCG retailers, customer service is always the first thing to go away. Ensuring there is a culture of service and knowledgable employees to help fulfill the shoppers’ lists will all help increase revenue.