Walmart's Short-Sighted Cost Cut: Profit-Sharing for Workers
Ever on the lookout for ways to slash costs, Walmart (WMT) executives have found yet another place to trim: After nearly 40 years, the retail behemoth is eliminating profit-sharing payouts to workers. This is one of those maneuvers that makes the bottom line look better in the short term, but could have insidious negative effects in the long run.
Instead of the profit-sharing plan, which added as much as 4 percent to workers' pay at the always-profitable chain, Walmart will offer an up to 6 percent match on funds workers deposit into their company 401(k) retirement accounts. The beauty of this seemingly magnanimous offer is that many low-paid retail workers don't participate in retirement plans. Bloomberg reports retail companies generally see lower-than-average participation rates, and the average is 75 percent.
Where previously everyone working more than a year got the profit-sharing payout, under the new plan Walmart only has to reward those who have the budget to put some money away. Given what Walmart pays line workers, it's unsurprising that participation might be low. Or that workers are pissed. A United Food and Commercial Workers spokeswoman sent out a statement that "To demand that people who already make poverty-level wages begin to pay in order to receive any retirement benefits is out of touch with the reality of employees' lives."
The final slap to workers in the new plan is that some of the savings from killing off profit-sharing is going into a fund for quarterly bonuses for employees at top-performing stores. So instead of a guaranteed financial thank-you for helping Walmart make its millions, come next February, workers will have a Vegas gambler's chance of landing some bonus money if their store does well as a unit. Given how many variables go into the profit picture at any particular Walmart store, count on workers to feel powerless to land the new bonus.
The critical factor Walmart executives have missed here -- which doesn't show up on their spreadsheets -- is the psychology of profit-sharing versus the psychology of a 401(k) match plus possible occasional bonus. These two structures feel quite different to a line worker. One can be highly motivating, the other is likely to be less so.
When you've got profit-sharing, you know you're in on the win. If the company is in the black, you will see a bonus and feel like you were compensated for contributing to the success. The reason companies do profit-sharing is it makes workers feel like they play a vital part in shaping the outcome. They know if they help the company net more profits, they will benefit, so they tend to go the extra mile.
When it's a company 401(k) match, that's nice, but much more disconnected from how the company is doing. It's an up-front promise made at the beginning of the year. If I'm a worker, where's my motivation to bust my hump and make this company more profitable, especially if I can't contribute to the retirement plan? In this scheme, the only upside is in the bonus-crapshoot, which is a much weaker lure than reliable profit participation.
This compensation switch is one of those business moves that looks great to bean counters. But there's no box on their charts for how lower worker morale might impact the company's profitability in future. The savings reaped from killing the profit-sharing plan founder Sam Walton started in the early 1970s could end up being dwarfed by the lost profits brought on by workers' lowered morale.
Photo via Flickr user Brave New Films
Related: