Walmart’s pay ratio reflects a business model that perpetuates income inequality


Walmart's CEO earns 1,188 times as much as the company's median worker.

In other words, it would take 11 such employees a century to earn what the CEO made in 2017.

It would take 100 such employees more than a decade. Walmart CEO Doug McMillon’s total compensation of $22.8 million certainly let’s him live by Walmart’s slogan to “save money and live better,” but the story for employees and long-term shareholders is different.  McMillon received a salary of $1.28 million, $15.69 million in stock-based pay, $4.74 million in non-equity incentive pay and another $1.1 million “other compensation.”

WalMart is the largest private-sector employer in the United States, with approximately 1.5 million employees. Half of them take home less than $19,177 per year.

A consumer facing business requires consumers that have discretionary income, as Henry Ford famously observed when he raised wages enough so that employees could purchase his automobiles. Many of the products sold at WalMart are staples that can and are often purchased with food stamps. Much has been written about the way that Walmart’s low pay means that employees rely on government assistance to make ends meet.  But the margins on such items cannot sustain the company. 

Even shareholders who have no moral compunctions or broader concerns about income inequality should read this Wall Street Journal report. In an experiment, the researchers offered participants a chance to win a gift card from one of two retailers in return for filling out a survey. In the first run of the experiment no information was offered on CEO pay or pay ration and 68% chose the first retailers card and 32% chose the second. When participants were given data that showed the first retailer had a very high pay ratio and the second a low one the change was dramatic: only 44% chose the first retailer and 56% chose the second. “Our results suggest that companies blowing past what people see as reasonable ratios of CEO pay to worker pay could take a hit to their business if the pay gaps are publicized.”  

It’s certainly choice I make as a consumer and it’s why I, and many others I know, shop at Costco -- a company I admire not only for its more modest compensation practices and the way it treats its workers and the quality of the goods.

Buybacks reflect a non-sustainable strategy

WalMart, like so many other companies lately, has been very active in buying back its own stock.

According to the Roosevelt Institute, Walmart “spent $14.4 billion in 2017 on shareholder payouts, by repurchasing its own stock and issuing dividends, and is authorized to spend $20 billion on ‘stock buybacks,’ formally known as open-market share repurchases, in 2018 and 2019.” Since Walmart’s profits in 2017 were $9.8 billion, the company spent more giving money to its current shareholders last year than it earned.

The Roosevelt Institute calculated that by spending $10 billion on increasing wages rather than buybacks. “1 million low-wage Walmart employees would see an hourly wage increase of over $5.66.”

Pay for performance promises broken

Sometimes with big chain stores what you are promised is not is not what you ultimately receive. The packaging can be splashy but the goods may be poorly constructed. 

Bloomberg broke a story soon after the release of the proxy noting that McMillon was awarded a higher cash bonus than he would have been if a 2017 commitment – to reduce incentive opportunities --  had been honored.

The commitment in the 2017 year’s proxy statement, as part of bold language highlighting compensation improvements, fell under a section on “what we changed” in which the company notes that that it conducted a comprehensive review of overall compensation and performance management programs. One change the company noted was that “Reduced annual cash incentive opportunities by 25%.”

The paragraph that introduced the planned reduction in bonuses stated explicitly that “changes will take effect beginning in fiscal 2018.”  WalMart has been trying to dial that back.  Walmart spokesperson Randy Hargrove told Retail Dive in an email that the bonus cuts weren't meant to happen until 2020. "A transition component for the program was inadvertently not reflected in the 2017 proxy statement, however we do not believe this was material to the overall description of our executive compensation program,” said Hargrove.

The only mention of 2020 in the proxy statement comes in discussion of equity plans. It is frankly hard to see how this mistake could be inadvertent.

Pay for performance plans are meaningless without confidence that they will be honored. The disclosure in the proxy statement is not a signed contract but if it is not something shareholders can rely on it is entirely meaningless.

What’s the endgame?

Transparency around pay ratios is a new concept. With absurd numbers such as those Doug McMillon exemplifies, we’re only just starting to see the scale of the problem. And as the Wall Street Journal showed, consumers are less likely to support a retailer that exacerbates income inequality. We’re only in the beginning of this period of transparency. Shareholders are consumers, and large funds are becoming more strident on social issues. Perception will sour on companies where CEOs continue to see pay balloon without returns reflective of those increases.