Why paying minimum wage hurts the bottom line

Paying employees higher wages and giving better benefits isn't actually costing some companies more money.

By Jim Cramer Dec 18, 2013 12:45PM

Fast food workers attend a protest against a restaurant in New York (© Eduardo Munoz/Reuters)When I first broke in at Goldman Sachs (GS) in the early 1980s, I was in charge of tabulating turnover in what was then known as the Securities Sales Department. It was my job to keep track of who stayed and who went, and to be sure I knew the details of each departure. I was told that, historically, Goldman Sachs tried hard not to lose anyone it wanted to keep, even as it was willing to see the others depart -- and, for the time when I did the tallying, the division's record was perfect on that score.

 

When I was first assigned the project, I had no idea why it was so important to keep track of how few people actually left the firm, other than for boasting rights vs. the competition, which always seemed to be losing people left and right.

 

But once I was in the fold, I realized the reason Goldman closely observed this number had to do with the tremendous cost of training people, and how departures -- any departures, of good people -- meant a total loss on an important human-capital investment.

 

In the division in which I worked, Goldman Sachs aspired for zero turnover because the firm spent, on average, six months teaching associates how to do their job -- and, during that period, these trainees were dead-weight losses to the firm. Trainees were sunk costs; you couldn't afford to lose the good ones. It could really hurt your firm's P&L, or profit and loss statement. The Street on MSN Money

 

Few issues could be more bedeviling to profitability than turnover, and Goldman Sachs did everything it could to discourage it, including paying people more, teaching people better and offering them more benefits than you could get elsewhere.

 

It worked. The firm was by far the most lucrative investment house on Wall Street then, and to a large extent it still is now, perhaps because it maintains an excellence in training.

 

Now fast-forward to Tuesday's interview with John Mackey and Walter Robb, co-CEOs of Whole Foods (WFM), at the opening of their Brooklyn store.

 

Both execs spoke intently and intensely about how turnover is the bane of their existence because it hurts all stakeholders, the remaining associates and managers left behind, the customers and the shareholders. In their opinion, paying people much more than the minimum wage, while offering them some of the best perks and benefits in the retail world, has led to a remarkable cost advantage -- not disadvantage -- vs. many retailers, where the goal seems to be to squeeze as much out of their workers as possible. Mackey and Robb know there's a big cost to the firm when people leave. They know that turnover is a killer to the bottom line.

 

I can think of only three other companies that have emphasized to me their desire to pay top dollar for associates while offering the best benefit packages: Starbucks (SBUX), Chipotle (CMG) and Costco (COST). All three make a point out of stressing retention, because training good people is so costly to the bottom line.

 

All three like to promote from within -- and, in fact, Chipotle goes so far as to encourage workers to take the next step up on a consistent basis. Costco has many times stressed to me that paying people the most and giving employees the best benefits are the principal underpinnings of the company's profitability. Jim Sinegal, the now-retired CEO of Costco and the most revered retailer alive, has insisted to me over and over again that Costco has become great because there is virtually no turnover. So this, and not just the membership card, is the real Costco advantage, as it lowers the cost of a store by 30% to 40% vs. the competition.

 

At a time when we are beginning to see labor unrest at the minimum-paying workplaces in the retail industry, it's important to point out that the most lucrative players in the business aren't debating how little they can pay. They are thinking about how much they can incent the good people so they don't lose them. Retention, and not blowing up that sunk cost of training: That's a huge secret behind the success of Whole Foods, Starbucks, Chipotle and Costco. No wonder they have the highest price-to-earnings ratios in their businesses.

 

They've figured out how to manage their biggest investment cost, their people. The more humane and the more remunerative these companies are to them, the bigger the bottom line.

Jim Cramer's headshot

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, had no positions in the securities mentioned.

 

Jim Cramer's Action Alerts Plus: Check out this charitable trust portfolio and uncover the stocks Cramer thinks could be winners.

 

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275Comments
Dec 18, 2013 1:46PM
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Minimum wage jobs are supposed to have high turnover - they aren't meant to be careers, they're just short term work that normal people use as a stepping stone.  As far as training someone for a minimum wage job - that should take about half a shift.  Many of the minimum wage jobs should be held by students, and it doesn't take long for them to graduate and/or  move onward and upward.  Then there's promotion from within - the bag boy becomes the checker and then the floor supervisor, the stock boy becomes a department manager, the fry cook becomes the shift supervisor, etc...  Maybe mixed in there somewhere are a few adults with families to support who lost a job recently.  But again, these people should be using their new minimum wage job as a short-term solution until they move on to bigger and better things.  Basically, the guy from Whole Foods is suggesting that so many of his employees would be so content to make their crappy job a career as long as they make a little more than minimum wage.  If that's true, it's really sad.

If you work a minimum wage job and don't have a plan to move up or aren't actively trying to find a better job somewhere else, you deserve nothing more than minimum wage.

Dec 18, 2013 1:33PM
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yea, but if you put a minimum wage at $15 an hour, or stipulate that all positions need to make a "Livable wage", what incentives are there to move out of fast food and better yourself. Keep the low level positions for High school kids. Also if the minimum wage is set at $15, then Costco will need to pay $20. And the min. wage will make a hamburger $20. I wont pay that, not at my salary. Ill want my salary doubled as well.   


Then where is this all going to get us. Let the market place decide  ... not government.

Dec 18, 2013 1:39PM
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The problem won't be fixed by making pay for work entry positions higher. We need those entry level jobs for young people to get their first experiences in the work force. It will only be fixed by stopping the bleeding of better paying jobs out of America. You would be treating the symptom instead of curing the diease otherwise.

Dec 18, 2013 2:18PM
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Get the illegals out of the USA.

Quit making it easier for a Pakistani (and others) to become a doctor (etc.) than a US Citizen.

Fair trade tariffs to stop the job bleed.

 

We're sold out boys and girls.  

Dec 18, 2013 1:00PM
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SMART COMPANIES consider turnover as hurtful. 

 

i left an engineering firm (aerosapce) several years back - and was engineer #22 to leave that department in the 3 years i was there.  this company was only around 120 people overall.  so turnover was AND STILL IS a problem there.  except the company is still too stupid to see this.  upper management still is untouched while they should actually be turned over.  meanwhile they get government contracts so i guess they don't care.

 

i saw this as well at a prior aerospace company where it turned out they could not retain ANY degreed engineers for longer than 10 months.  meanwhile they get government contracts so i guess they don't care.

 

i moved back to the commercial side of the engineering industry. 

 

so perhaps while turn over is a serious business problem, in the white collar welfare world of aerospace, it's no big deal. 

Dec 18, 2013 2:34PM
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We used to have 7 million small farms in this country too, we are now down to 2 million. Many kids worked on those farms during the summer. We used to have canning factories and now if you go to the dollar store you will see much of the food comes from China.
Dec 18, 2013 2:37PM
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Stop reverse discrimination........ You're taking one on your best pieces off the chess board. Why?

 

Loan money for start ups.......... to white men too......... For christ sake. We need the jobs. 

Dec 18, 2013 2:08PM
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This $15 minimum wage is just more smoke and mirrors to distract citizens from the loss of good jobs off shored. What are we going to do push thier wage up just high enough so they can't get any guberment help.......... What the shlt did that do? You think they are going to drop the taxes on us when that happens?............These people will realize no real progress.
Dec 18, 2013 2:01PM
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First president to be downgraded by Moody ?
Dec 18, 2013 2:33PM
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Do the Kardsashian twats know any white men ?
WTF , they can only mate with swarthy animals ?

Dec 18, 2013 4:31PM
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I am surprised the market went up on the idea of lowering the stimulus.
That would imply the feds think we can actually have a real economy.
The ecomonic numbers belie that though. We are still stagnant.
Since it's all rigged, one would think it would drop with that announcement ?
Interesting

Dec 18, 2013 4:48PM
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Did anyone really believe the Fed would end QE suddenly? No one to my knowledge. So like ABS I really don't understand this huge rally. If the market had built in a complete withdrawal of QE then yes it would make sense. Everything we have been reading has suggested a slow withdrawal. Does not compute to me. 
Dec 18, 2013 4:11PM
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Well cross off the idea of owning a fast food joint , or some other start up retail store.
Now the part timers will make more than you will the first few years.
You need to increase profit, raise your costs. can't compete , say goodnight.
But your workers will feel great , they made $15.00 an hour while texting behind your back,  for the 1.5 years you were actually in business !

Yup, another job killing leftists utopia.

Dec 18, 2013 2:03PM
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"incent the good people"

 

Is this the ones that lick the taco shells before they make your taco? 

Dec 18, 2013 3:42PM
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The author didn't mention that many jobs don't require much training. There's a big difference between a professional at a brokerage firm and a uneducated schmuck flipping burgers or asking if you would like fries or a drink with your meal. Fast food employers have this figured out.
Dec 18, 2013 3:24PM
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OH check this out....

Headline....
Fed will reduce bond purchases by $10B in January


Now to start the violins.....who is first to start wailing about how its not big enough a taper?


Dec 18, 2013 5:17PM
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MAXIMUS ARTILIRUS

ARE YOU ONE OF THE TROLLS THAT WAS BOOTED FROM THE OTHER MSN SITE ALONG WITH YOUR FELLOW BRETHREN ?

LET ME ASK YOU MASTER TRADER ,,,,,WHAT DO YOU THINK OF KODIAK  ?

Dec 18, 2013 2:01PM
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For a change, Cramer is right on.

Human capital works best when the risk-reward factor(s) assigned to areas such hiring, training and retention are minimized over the greater time-horizon.   As noted, the employee works best when his / her status is elevated from liability to asset...indeed, strong asset.  It is for this reason, among others, that ESOPs are perhaps superior to union-building in terms of retaining those with the most to gain by remaining and pursuing diligence in their efforts.  To mis-quote " Excalibur",   " We and the Company are One". 

Some can argue that labor unions are "socialist" and the like, however, its more in synch with the tenets of pure capitalism, where labor can -via cohesive activity- pursue what it (as a bloc) is really worth, acting against the resistive monolith of the employer, who holds all the power.  Unions are the net negotiating mechanism whereby the individual can literally "level the playing field" vis-a-vis Big Money.

Nonetheless, the real answer from the purely-capital standpoint is the Stock Option Program.
Having participated in one ( in the private sector) I can bespeak of how it encouraged greater effort, in-house harmony and therefore, increased productivity for our company.  As individuals feel lost inside the larger corporate cogs, it becomes inherently more important to harvest the larger potential of labor to achieve those efficiencies.

In short, as Goldman itself used to proclaim, " Greedy....but for the Long Term".

Thank you Mr Cramer.

Dec 18, 2013 5:10PM
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DO KEEP IN MIND....That we dropped about 250+ points last week, on a week to week..

So with knowledge of where we might be headed, we are pretty much only gaining that back..

But, I am somewhat surprised of being about 300 points up...Seems a little overdone..

And tomorrow may be more telling...?


Now if only Ford had not taken a shidt today, we would have had a fantastic day, instead of a very good one...

Dec 18, 2013 5:36PM
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What a douche bag our new invented persona - MAXIMUTANT is !.
I can clearly see , he's as wealthy and wise as Brent is !!

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