What If Henry Ford Ran Walmart?
Since 2000, corporate profits have jumped 80%, while real compensation has risen just 8%, and the real median family income has dropped 5%.
The money's flowing somewhere -- but not to most of us.
This is doubly frustrating because it traps us in a vicious cycle. Because consumer spending drives nearly 70% of the economy, we need consumers to spend their paychecks for GDP to grow. Yet consumers can't increase spending if their income isn't growing.
What America's big companies -- especially Walmart -- need right now are people like Henry Ford in charge.
One of the Greatest Business Decisions of All Time
Henry Ford is famous for mass-producing the automobile with an assembly line. But the part of his legacy we should be looking back to and learning from today was born in 1914 -- one year after his assembly line's implementation.
This was when he effectively doubled his workers' pay to $5 a day, a move Fortune magazine recently declared one of "the greatest business decisions of all time."
Some folks then and now misinterpreted this move as an act of charity on his part. But what actually motivated Ford was profit.
This left the company with the ever-growing expense of recruiting, interviewing, and training new employees to fill their shoes. By doubling employee pay, he successfully convinced employees that working on the line wasn't so bad after all ... at least not while making twice what they'd make elsewhere.
The move -- which cost nearly $10 million at the time to implement -- became "one of the finest cost-cutting moves we ever made," according to Ford himself. Productivity jumped and employee turnover dropped from 370% to just 16%.
And a Consumer Revolution Began ...
This doubling of Ford's workers' wages had tangential effects on the rest of the American economy.
Most obviously, he increased his employees' discretionary spending.
He was also able to pass savings on to consumers with lower automobile prices. The cost of a Model T dropped 10% each year from 1914 to 1916 (while Ford's profits doubled to $60 million). This in turn saved the general consumer more money that they could then spend elsewhere.
It Could Work Today, Too
This is a plan that doesn't rely on the government raising the minimum wage. It's also not a cure-all move that would or could work with every company.
But raising employees' salaries is a proven money-saving tactic that more CEOs should consider today, especially where employee turnover is ridiculously high -- as it is at Walmart.
Adding more fuel to this argument is the fact that despite the fact that Walmart is the third-largest company in the world on a revenue basis (earning more than $15 billion profit each year), and has a CEO whose compensation for two or three hours is more than his average employee earns in a year), "as many as 80% of workers in Wal-Mart stores use food stamps," according to Daily Kos. All told, according to Daily Kos, "Wal-Mart's employees receive $2.66 billion in government help every year."
So a move by Walmart to raise wages would improve their employee's lifestyle, boost its profit margin (as turnover and the costs associated with it would fall), all while lowering government entitlement spending.
Looks like a win-win -- and it's as simple as Walmart's CEO Mike Duke taking a page from Henry Ford's playbook.
This article was written by Motley Fool analyst Adam J. Wiederman.