Wal-Mart, McDonald's, Costco, and Chipotle: The Myopia of Low Wages

Source: Chipotle Mexican Grill

The debate over wages is getting increasingly intense lately, and companies such as Wal-Mart and McDonald's are attracting plenty of attention and criticism because of the insufficient salaries they pay to employees.

While the ethical dimension of the discussion is clearly very important, there are also some essential business lessons to be learned. Competitors such as Costco and Chipotle Mexican Grill are proving that paying higher salaries can sometimes be a superior strategy in terms of maximizing financial performance.

In its latest earnings report, Wal-Mart admits that "changes in the amount of payments made under the Supplemental Nutrition Assistance Plan and other public assistance plans" is one of the risks factors that could potentially hurt the company's business.

This is no big surprise considering that Wal-Mart has always been known for its low prices, particularly targeting low-income workers and the unemployed. But the irony of the matter is that Wal-Mart employees are among the company's main customers and many of them receive public assistance because of the insufficient wages paid by the retailer.

According to several reports, Wal-Mart employees may be the largest group of Medicaid and food-stamp recipients in the U.S. The same goes for workers at fast-food chains: one study reported that 52% of families of workers in the industry are enrolled in at least one public-assistance program, and industry giant McDonald's has received a lot of criticism for advising employees to enroll in assistance programs as a way to make ends meet financially.

The low wages paid by corporations like Wal-Mart and McDonald's can raise a lot of questions from multiple perspectives. Are taxpayers subsidizing the profits and dividends paid by these companies because of the economic costs of welfare? Should companies be allowed to pay these kinds of salaries or does the minimum wage need to be raised?

Maybe paying the lowest possible wages is not the best strategy from a business perspective. Employees are not just a source of expenses on the income statement; they are also a crucial resource for companies when it comes to generating growth and competing in the increasingly dynamic global environment.

Like Wal-Mart, Costco is in the business of discount retail, so the company needs to keep its costs at bay if it's going to provide competitively low prices for its customers. Costco saves as much money as possible in areas like marketing and store decoration, among others, but the company understands the importance of attracting and retaining a talented workforce.

A 2005 article in The New York Times called Costco "The Anti-Wal-Mart," explaining how the company has chosen a completely different path when it comes to salaries and other human-resources policies. Costco pays considerably better salaries than Wal-Mart, and the company provides superior benefits and opportunities for professional growth.

In the article, Costco co-founder Jim Sinegal explained that higher productivity, better customer service, and lower employee turnover rates provide an advantage for Costco versus the competition: "This is not altruistic. This is good business."  

Costco has materially outperformed Wal-Mart and its Sam's Club division over the last years. There is a wide variety of factors to consider when evaluating this difference in performance that cannot be attributed to human-resource policies alone. But the fact that Costco is generating superior results while paying decent salaries and providing better conditions for workers may indicate that minimizing remuneration as much as possible is not necessarily the best way to create value for shareholders.  

Chipotle Mexican Grill is not the typical fast-food chain: The company's "food with integrity" philosophy means special care to ethical and sustainability standards. This doesn't apply only to food and ingredients, but also to the company's relationship with its employees.

Chipotle pays better salaries than competing fast-food chains, and the company is also far more generous when it comes to benefits such as health-care insurance, 401(k) participation, and bonuses. Importantly, this high-growth company offers superior opportunities for learning and promotion, so worker incentives are clearly more encouraging at Chipotle.

A typical meal at Chipotle costs a few bucks more than at McDonald's, but this is no impediment for the company when it comes to gaining market share versus the competition. While sales at Chipotle Mexican Grill jumped by a spicy 20.7% during the fourth quarter of 2013, McDonald's is struggling with declining same-store sales in the U.S.  

There is much more to Chipotle's success than its human-resources policies, but the company provides another example on the importance of having a smart and holistic approach to salaries and employee benefits. Investing in human resources can sometimes be a very profitable decision in terms of long term shareholder returns.

There is a lot to be said about the low wages paid by many big U.S. corporations such as Wal-Mart and McDonalds, and the ethical implications and economic consequences of these policies are a subject of much debate. Equally as important, from a business perspective, is how other companies like Costco and Chipotle Mexican Grill seem to be demonstrating that paying higher salaries and providing better conditions for employees can be a more intelligent strategy to generate superior returns for shareholders.

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The article Wal-Mart, McDonald's, Costco, and Chipotle: The Myopia of Low Wages originally appeared on Fool.com.

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends Chipotle Mexican Grill, Costco Wholesale, and McDonald's. The Motley Fool owns shares of Chipotle Mexican Grill, Costco Wholesale, and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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