It goes without saying that the wage rate plays a predominant role in any employee�s motivation to work. Retail trade has historically paid lower wages than most industries, a fact owing to presumably low skill requirements and low profit margins to match. This paper will explore an alternative hypothesis, that these low profit margins and low skill levels-along with low productive efficiency, high rates of turnover, and arguably poor customer service-in retail operations are actually direct reflections of the low wages that typify the industry in the first place. A revised wage strategy, incorporating efficiency wages with training and benefits based on performance, would reduce turnover, increase efficiency and enhance what is really a highly marketable skill-customer service.
Effects of Wage Determinations in the Retail Industry
Economics, as Adam Smith argued in the eighteenth century, is largely an expression of interactive material self-interest. As applied to commercial markets, this principle means that businesses buy, produce, and sell their goods for the sole purpose of making a profit. Economic activity may be further expressed in general terms of scarcity and want, in which goods are produced to satisfy the want, and resources are exploited to produce the goods (Arnold, 2001). Business managers therefore seek to achieve their profitability goals in part by investing in resources, capital and labor, as factors of production. Unfortunately, a tendency to view labor as just another resource plagues many businesses, most notably those in the retail industry. Because labor in the retail industry is often deemed highly elastic, that is, substitutable or replaceable, managers in the retail trade tend to underestimate the human resource potential for contributing to the long-term production and profitability of their firms (Bernhardt, 1999; Sparks, 1992).
A Microeconomic Perspective of Labor
Of course, it is true that labor is a factor market in itself, in which workers are hired in order to increase production, hence profitability - so long as certain conditions hold, such as marginal revenue product exceeding marginal revenue costs (Arnold, 2001). As Ritter and Taylor (1997) have noted dryly, �On one level, economists can analyze labor markets using the same supply and demand model they might apply to, say, wheat� (par. 3). This basic nuts-and-bolts economic perspective of labor and wages has been adopted by many managers, particularly in retail trade. The problem is that it neglects the obvious, that workers are also active players in the economy, and therefore also out to benefit themselves and further their own interests. �Retail management�s view of employment is often highly coloured by a rigid cost approach� (Sparks, 1992, par. 3). People are unlike inanimate resources, in that they live, breathe, make decisions, and generally require incentives in order to change their patterns of behavior (Ritter & Taylor, 1997; Moorhead & Griffin, 2001). Failure to acknowledge this behavioral, humanistic aspect of labor in microeconomic settings has arguably contributed to the dismal financial performance of retail businesses in recent years, with the notable exception of Wal-Mart. However, even Wal-Mart apparently owes its current competitive edge to heavy investments in technology rather than training or rewarding its people (Bernhardt, 1999).
One proposed means of counteracting this trend is the payment of efficiency wages, or above-market wages. Critics have variously argued that efficiency wages (EW) are essentially counterproductive, that increased production is more than nullified by increased labor costs, and that on a market level EW contributes as much to unemployment as to higher productivity (Carter, 1999). On the other hand, empirical studies have vindicated the efficiency wage approach in cost-benefit terms as a profitable incentive to efficient productivity, when viewed in light of other factors such as turnover and shirking, or the �hidden costs� of low wages (Carter, 1999). Another approach is to refocus on �competency-based pay,� finding objective criteria for linking pay to performance at an individual level, rather than merely bumping wages above the current market level for all the employees in the firm (Jahja & Kleiner, 1997). Combining the basic premises of EW theory with the principles of performance management would therefore seem to at least provide a solid conceptual framework for addressing what is otherwise too often a simplistic approach to hiring and paying workers in the retail sector.
Employee Motivation and Production
If profitability for the firm is contingent on efficient production (it is), it follows that at the heart of the wage issue is employee motivation to produce. People do not work for self fulfillment or for the exercise; they work for money and benefits. So in turn, at the heart of the employees� motivation is monetary compensation for their labor. What has yet to be determined is whether the amount of the paycheck can be justified-from an employee motivational standpoint - in light of the quality and quantity of the work. Unfortunately, motivational theories tend to be psychological in nature (Moorhead & Griffin, 2001), and addressed apart from labor and production theories, which are treated in an economic context (Arnold, 2001). Even EW theory is usually presented in terms of costs - as the cost of curtailing shirking, for instance - rather than as a positive motivator for driving productivity or increasing marginal revenue, and again does not seem to take into account performance management, which is the best way to deter shirking anyway. Through a combined strategy of efficiency wages and scaled (future-looking) performance-based rewards, however, the best workers stay with the firm:
The most obvious solution is to make jobs available in a direct manner by paying more.
The firm�s strategy here entails the use of a �carrot� and a �stick.� As in the work-life
incentives model, the stick is the threat of dismissal. The carrot is the promise of a high-paying
job (Ritter & Taylor, 1997, par. 48).
Retailers by and large do not seem to feel they can afford the �carrot� side of this arrangement, so they dismiss its potential for profitability from the outset. All they have left is a tiny �stick,� an empty threat of losing what amounts to a dead-end job. Instead, retail managers favor a simplistic strategy of managing costs and the �bottom line� (Sparks, 1992; Bernhardt, 1999). It should come as no surprise, then, that the retail sector is the lowest-paying industry of nine listed by the U.S. Department of Labor (Bureau of Labor Statistics, 2003), and one of the least profitable (Bernhardt, 1999).
When it comes to labor in retailing, cutting costs is clearly not the answer, and often leads to greater costs. As Ritter and Taylor (1997) have observed, labor is a �special� market which presents special challenges beyond simple supply and demand analysis. Properly managed, an EW strategy may meet those challenges. Benefits of a well-managed approach include: (1) greater effort, hence productivity; (2) reduced turnover and associated costs (quantifiable and otherwise); (3) decreased shirking, at least when performance is also observed or managed; and (4) other, more indirect benefits such as accumulated experience, loyalty, and reliability (Carter, 1992). Nordstrom Inc., the Seattle-based firm, has proven that retailing need not be driven by negative industry trends. Nordstrom boasts of a considerable above industry average retention rate, by linking pay to performance, promoting from within, and offering various benefits including profit-sharing programs (Joinson, 1999).
Particular Effects of Low Wages in Retail
Of course, the converse of the happy scenario described above is that low wages tend to produce undesired effects. Most obvious among these from a cost-and-production perspective is low productivity from the individual worker in the firm. As Arnold (2001) indicates, production at an individual level is measured by the marginal physical product of labor, which is determined largely by degree of effort. Such effort is inextricably linked to pay. Likewise, the wage rate (price of labor) determines supply, according to the law of supply and demand applied to the labor market (Arnold, 2001). It follows that as long as wages in retail remain disproportionately low, i.e., to the real wage, so does the supply of desired labor. The prevailing wisdom is that EW serves a singular purpose: to deter shirking, and thereby reduce monitoring costs (Arnold, 2001). However, due to the market realities of supply and demand, low-paid workers are eager to find employment elsewhere (even if another retail firm) - which leads to another costly ill effect of low wages, turnover. �And in the world of retail, turnover comes with the territory� (Joinson, 1999, par. 2). Research by Carter (1999) suggests that EW rates serve to reduce turnover, which amounts to another good reason to reconsider EW compensation strategies.
In the retail industry especially, these two aforementioned tendencies of labor, arguably subject to correction according to EW theory - minimal effort and high turnover - are interpreted by consumers (those who ultimately dictate the firm�s success) as indicators of poor customer service. For retailers, the importance of high-performance customer service can scarcely be overstated. Customer satisfaction in retail plays just about the same success-determinative role as does product quality in manufacturing:
Quality�is �the totality of features and characteristics of a product or service that bear on its
ability to satisfy stated or implied needs.��.In a retail setting, the interaction between customers
and salespeople constitutes a unique and important dimension of performance (Darian, Tucci &
Wiman, 2001, par. 13)
.
During the last few decades, managers of retail firms have come to at least recognize the importance of customer service, customer satisfaction, and a general customer orientation (Darian, et al, 2001). However, in many cases these same managers have proven unwilling to make the investments in labor necessary to increase service levels. Customer service is a labor intensive firm attribute, so it would seem reasonable for managers to pay good money for the single factor that theoretically would provide them a distinctive competitive edge.
Retail customers will often switch to a competitor�s product (often the very same product at or near the very same price) strictly because of poor customer service. Specific service deficient areas include: little or no direct, personal attention to the customer; workers who are rude and reluctant to help; lack of available workers who are knowledgeable about the product; slow reaction time to customer demand, especially at the checkout lines; and generally a poor track record of responding to the customer (Darian et al, 2001). These areas are for the most part indicators of the low-wage/high-turnover phenomenon that retailers are apparently willing to ignore (Darian et al, 2001). Clearly they do so to their own peril.
Turnover, especially, is widespread in the retail business - and financially disastrous. Whereas managers may find hiring and firing workers a standard job function, few seem to comprehend the costs of high turnover to the service end of the business. In their research, Casey and Warlin (2001) have documented disturbing trends in retail implying a direct correlation between turnover and customer perceptions of service. (Some managers would argue here that a perception is �subjective� by definition. That may be true, but in a customer-driven industry, that perception just happens to be what generates revenue.) According to the customers themselves, service in the industry suffers because retention is so shoddy. Apparently, customers have the ability to discern that an employee is a valuable resource - even if managers do not.
Specific survey results from Casey and Warlin (2001) disclosed the following: (1) Four out of ten consumers are committed to their providers. At first blush, that may sound like the problem is with the customer rather than the service, but further research shows that customer commitment is also poorest in the same companies in which employee retention is poorest. Customer disloyalty is therefore an effect, not a cause. (2) Less than one-fifth of consumers believe their providers retain the best employees. (3) One fifth of consumers believe their providers to be a good company to work for. (4) Almost half of respondents cited personnel problems as the biggest hindrance to customer service, ahead of price or product issues.
The Socialist Mindset
All this is enough to suggest that the conventional wisdom about retail skill requirements is simply wrong. Customer service is actually a highly marketable skill (or should be), at least from the perspective of the ultimate determinant of success, the customer. That is, if quality service is considered so important that consumers are actively searching for other places to buy their goods for that reason alone, then it cannot be rightly said that retail is low skill labor. Managers would be wise to recognize the tremendous opportunity implied by such a revelation. By taking the money they currently use to continually find, hire and train new employees, and instead using it to invest in wages, ongoing training and benefits, retailers could effectively and profitably respond to a market demand for enhanced service. Unfortunately, in most instances they will not. Because labor costs account for such a large chunk of operating expenses, �retailers may not feel that providing greater satisfaction is cost-effective� (Darian, et al, 2001, par. 16).
Perhaps the problem is even more fundamental than a determination to cut costs. As Arnold (2001) notes, capitalism and socialism are basically different visions that shape different economic systems. It could be argued that at a microeconomic level, retail managers are actually acting as socialist thinkers in setting price ceilings for labor: �A socialist thinker views price in a very different light. The rationing, information-transmitting, and incentive-producing functions of price are largely invisible to or ignored by the socialist thinker� (Arnold, 2001, p. 49). Political analyst George Will (1990) has described socialism in terms of enforced equality: �It carries the heavy baggage of having to believe that wealth and opportunity should be allocated somewhat coercively, to minimize the influence of talent� (p. 112). Such a restrictive social philosophy is comparable to the pay philosophy of many retail firms. Socialists - or according to this thesis, retail managers - would prefer to control the price of labor than allow the market to rightly determine the price for them. By imposing pay �ceilings� or �windows� (along with tiny commissions, in some cases) on their workers, managers and owners delimit the performance incentives and entrepreneurial instincts rightly associated with free enterprise.
Conclusions
None of this is to say that running a retail operation is easy, or that its operators have unlimited financial resources with which to try out various hiring and compensation strategies. However, too much empirical data is available demonstrating that the impersonal, cost-sensitive �bottom line� approach simply does not work in retail (except of course for Wal-Mart, and the market only has enough room for one Wal-Mart). For these reasons and possibly others, the �Company Doctor� offers this sound advice, tip number five, for ailing businesses:
Don�t focus on cutting wages and benefits, unless you want corresponding cuts in productivity.
Instead, consider offering company-paid training to increase employee productivity, then increase
worker pay if the new skills bring additional profits to the company (Clark, 1999, par. 8).
Until quite recently, Home Depot was considered by most analysts the strongest North American retailer next to Wal-Mart. It light of the evidence reviewed here, it should come as no surprise that until quite recently, Home Depot was also committed to a competitive above-market wage, a forty-hour work week for the majority of its associates, pay increases and merit increases based on monitored performance, and a minimum of 4.2 hours of training per week per associate. As an employee of Home Depot, I would say that those days appear to be over. Chairman and CEO Bob Nardelli seems convinced that a drop in earnings associated with the first quarterly sales decline in company history is due to aging stores, too few associates in the aisles, and poor advertising. I would have to respectfully disagree, along with others: �Some analysts have blamed Mr. Nardelli and his management team for hurting sales by cutting store inventory and relying more on less-experienced part-time employees. As a result, many customers couldn�t find products or get the home-improvement advice they had come to expect� (Terhune, 2003). In other words, after decades of success in properly training, compensating and otherwise investing in its workers, Home Depot is adopting the timeworn losing retail strategy of cutting costs and replacing more experienced (and more expensive) associates with cheap part-time labor. [Note: Nardelli and Home Depot have, since this paper was written, restored the full-time/part-time labor ratio to something like what it was originally. Furthermore, new and sophisticated online and on-ground training programs have been implemented, so that human resource development again seems to be at the forefront of company strategy. For these and other recently introduced labor-friendly initiatives Nardelli and his management team are to be commended.]
At the time of this writing, political pundits and economists are debating President Bush�s tax cut plan. Whereas various parties are divided over how much to cut-not to mention how much to reduce spending and how much to commit to deficit reduction-hardly anyone is opposed to the tax cut idea per se. The reason should be obvious. A stagnant economy is a sign of consumer financial insecurity. Having to pay inordinate amounts of tax only adds to that insecurity, whereas a tax cut literally reduces it. In the same way that tax cuts are meant to serve as a stimulus for the larger economy (by redirecting, or investing, tax revenues back into the hands of consumers), individual investments in the retail labor market, through a combination of efficiency wages and performance-based increases and benefits, should serve as microeconomic stimuli for the businesses that often lead the way in driving that economy.
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