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Tuesday, August 16, 2011

Essay on Wal-Mart's Compensation Plan

I. a       It is beyond any doubt that Wal-Mart is a symbol of financial success for any business organization.  Since the company was founded in 1945, it has been one of the “superpowers” in the retail industry.  It is one of the biggest corporations in the world today.  It has millions of employees worldwide larger than that of GM, Ford, GE, and IBM combined. As of January 31, 2008, it operated 971 discount stores, 2,447 supercenters, 132 neighborhood markets, and 591 Sam's Clubs in the United States; and 21 units in Argentina, 313 in Brazil, 305 in Canada, 149 in Costa Rica, 70 in El Salvador, 145 in Guatemala, 47 in Honduras, 394 in Japan, 1,023 in Mexico, 46 in Nicaragua, 54 in Puerto Rico, and 352 in the United Kingdom, as well as 202 stores through joint ventures in China (Yahoo Finance, 2008, p.1). Despite having ruled the retail industry for years, it still continues to grow and dominate that industry.   

Wal-Mart proclaims that the reason for its success is its company policy of “Every Day Low Prices.”  The company’s efficient logistics system gives it the advantage of being able to order large quantities of products from its manufacturers and producers making it possible for them to sell their products for a cheaper price.  What is not being said, however, speaks more eloquently than what is being said.  A major reason why the company has been able to maintain low prices is its ability to limit its overhead costs which include payroll or employee compensation.  Payroll or compensation of employees occupies a huge chunk of every company’s overhead cost. 

What makes Wal-Mart different from other companies is that through the years, it has managed to control the wages and benefits of its employees.  Sam Walton was noted to have remarked that “no matter how you slice it in the retail business, payroll is one of the most important parts of overhead, and overhead is one of the most crucial things you have to fight to maintain your profit margin.”  (Simon Head, 2004, p.5)  This was done primarily by means of understaffing and by controlling the wages and benefits of its employees down to the minimum.  Because of the concerted effort to minimize labor cost by controlling the wages and benefits, both monetary and non-monetary, of the employees, Wal-Mart has been frequently involved in litigations for non-payment of wages, overtime pay, unfair labor practices and discrimination.  Research shows that in the last few years, over 100 unfair labor practices have been filed against Wal-Mart throughout the country, with 43 charges filed in 2002 alone.  In the 2004, a class-action suit was filed by over 1.6 million current and past women employees against Wal-Mart seeking redress against the company for discriminating against its female employees (Myron Curry, 2004, p1).  If this suit progresses, Wal-Mart may later on be forced to settle this suit and pay these employees millions of dollars in damages.  These countless suits and litigations and the damages it has paid against its employees have severely affected the Wal-Mart’s reputation all over the world.

I.b.       In designing a new compensation plan for Wal-Mart in its business in China, it must conduct due diligence and extensive researched about existing and new regulations in the host country.  One issue that Wal-Mart has to take into account is the Labor Contract Law recently passed in China which took effect last January 1, 2008.  Under this law, employees who have worked at least 10 years are entitled to sign labor contracts with no fixed termination dates (Xinhua News Agency, 2008, p.1).  Wal-Mart must make sure that they are able to comply with The Labor Contract Law and other existing laws.    

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I.c.       One of the major implications for the intended unionization is that employees in China will have greater protection against labor abuses.  In addition to the new laws passed, they could secure better terms and conditions from Wal-Mart through their unions if the latter will be aggressive and work hard towards representing the cause of the employees.  However, realistically speaking, labor laws in China are still young compared to US Laws.  For several decades, China has been known as a haven for companies that engaged in underpayment of ages, forced labor and other abuses against their employees.  If Wal-Mart has been able to elude the strict labor laws in the US, it can still do the same in China where enforcement and regulatory laws are not yet as strict as the US laws.

II.a.      The Employee Compensation Plan that I aim to design seeks to do away with the company mindset of sacrificing the employees for the sake of company profits.  I aim to instill the value that employees are the company’s number one asset.  If it seeks to remain in the top of the retail industry, Wal-Mart must treat its employees well.  The idea is that by not merely complying with existing labor laws but by giving to the employees what they deserve, Wal-Mart can get the most from their existing employees.  They will become more productive, turnovers will be decreased and suits and litigations will be avoided. 

The Employee Compensation Plan that I designed is one that is based on employee performance.  Performance takes into account productivity, efficiency, attendance, and skills.  It has six basic components, all of which are essential in giving what the employees need to improve their living conditions without necessarily sacrificing Wal-Mart’s financial success.  The first component is salary.  Wal-Mart’s associates should receive at least the same amount of daily wage as the other companies in the retail industry.  On the premise that Wal-Mart employees are more productive and well-rounded compared to other companies, it would therefore be an injustice to deny this to them.  Second component is annual incentive plans depending on the company performance.  Employees who know that they will receive additional compensation if Wal-Mart reaches its target will be more motivated to work harder.  Third component is bonus. Bonus is something that is given out of gratuity for employees whose performance exceeds the employer’s expectations.  The fourth component is the long-term incentive plans such as stock-based plans giving the supervisory-level employees up to managerial-level employees, opportunity to participate at stock options.  The fifth component is the Perquisites offered to managerial employees which include car plans, housing plans, and retirement plans. The sixth component is the non-monetary benefits given to all employees which include health care and vacation leaves.

II.b.      The members of the Compensation Committee in charge of the compensation plan should be composed of three members who all occupy at least managerial positions within the company.  One of the members of the committee should be an outsider.   The purpose for an external member is to ensure independence in judgment of at least one of the members of the committee. 

There should be substantial differences between hourly-paid employees and salaried employees.  The former is not entitled to a fixed daily wage and does not receive any pay for days where they do not report for work.  The latter however is entitled to a fixed daily wage who is also entitled to leaves with pay.

Not all sales employees are entitled to salaries.  For some of them, Wal-Mart may not have employer-employee relationships with them. In the case of sales employees who are not considered employees of Wal-Mart they shall only be entitled to commission.  Their income will mainly depend on the number of items they are able to sell in a given pay period.  On the other hand, some sales employees can be considered as Wal-Mart employees.  In this case, these sales employees will be entitled to a fix wage.  If they are able to sell more, they will be entitled to additional compensation. 

Executives and professional employees should be entitled to the salaries and benefits.  The only difference would be in the amount of the wage and in the nature of the perquisites. 

Expatriate employees are those who are residents of other country whom a company in another country hires as its employee.  Expatriate employees are hired primarily because of the peculiar skills and experience that they bring to the company which the other local-based employees do not have.  In this regard, they are paid more and receive substantially higher benefits compared to local employees. 

The level of competitiveness of a company’s compensation plan should be compared to the other companies belonging to the same industry as Wal-Mart and from a national perspective.  As mentioned earlier, it is not only the salary that should be measured but the entire compensation plan inclusive of bonuses, incentives, perquisites should be compared to the company’s competitors.   

A competitive compensation plan must not only include a person’s salaries but it must also include annual incentive plans, bonus, long term incentive plans and perquisites.  It must however be stressed that non-cash incentives or benefits cannot replace but can only supplement cash compensation.   

In a service-oriented industry which Wal-Mart belongs employee productivity is a source of competitive advantage.  The performance-based compensation plan offers the advantage of motivating the employees work with the company towards the accomplishment of corporate goals and objectives.  It will improve corporate image of Wal-Mart by showing to the world that Wal-Mart also cares for its employees.

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