A Tale of Two Pay Packets Pat works in the men’s clothing section of a well-known department store. He has been in that position for more than 20 years, and his hourly wage is $11. 25 per hour. Across town, Lucy is working in another highly successful retail chain and earns slightly less, around $10. 75 per hour. She will make $19,000 a year, calculated over an average working week. Pat will make over $90,000. Pat works at Nordstrom, Lucy is from Walmart, and both are employed at successful companies that offer vastly different compensation and benefits.
What is the impact of these differing compensation policies on employee behaviours, and what link (if any) is there to each company’s organisational performance? Nordstrom: Incentivising Service Nordstrom began as a Seattle shoe retailer in 1901, and soon branched out into apparel. By the 1980’s it was a multi-billion dollar retailing behemoth, with large full-line department stores offering the nation’s leading range of speciality apparel, shoes and accessories (Weston, 1999). Nordstrom has come to be recognised as an up-market retailer that puts a premium on delivering “heroic” customer service, internally dubbed “The Nordstrom Way”.
This focus on the customer has been one of the primary drivers of Nordstrom’s extraordinary 20 years of double-digit growth, which has also resulted in the highest sales per square foot in the industry (Weston, 1999). Nordstrom’s management has developed a highly trained sales force, and linked employee compensation and benefits to the consistent delivery of its lofty service standards. Employee pay is based primarily on sales commissions, and sales per hour (SPH) is the main performance metric that is measured. Nordstrom employees are encouraged to set their own SPH targets, earning from 6. % to 10% commission on net sales if they achieve or exceed this goal (failure to do so results in only a base hourly rate being paid). Top salespeople have the potential to earn six figure salaries (Frey, 2004), although less than half a percent reach this top echelon. The average Nordstrom employee takes home $32,000 a year, still well above the industry standard. The company also offers an employee profit-sharing retirement plan, with contributions made into the fund from the company’s yearly net profit (Norstrom. com).
Other benefits include medical, dental, life insurance and disease prevention programs, amongst the most generous in the retail sector. The Nordstrom Way Most new employees of Nordstrom will be told the following true story. One day, an older gentleman walked into a Nordstrom store and asked to see the store manager. He angrily explained that the tyres he had bought from the store the year before were now defective, and demanded his money back. Without hesitation, the manager cheerfully refunded the customer’s money. Nordstrom does not sell tyres (Spector and McCarthy, 2000).
Nordstrom uses its “heroic tales” to emphasize that superior customer service is the cultural core of the organisation, and one of the key components in maintaining this cultural focus is Nordstrom’s compensation policy. Nordstrom will systematically track feedback from customers, and link each employee’s compensation and advancement to these comments (Collins and Porass, 1994). Sales associates with strong customer feedback and a high SPH are offered the most attractive hours, superior staff discounts, bonuses, and company-wide recognition (Collins and Porass, 1994).
After each pay period, SPH rankings are posted for all staff to see. As there is no absolute measure of sales performance, this ranking system tends to drive up SPH in stores, as employees work harder to outperform each other. Profit share is tied directly to the performance of the company, which is meant to encourage staff productivity and promote company loyalty (ideas. medallia. com, 2011). To compliment this high performance work culture, Nordstrom gives its front line employees a large degree of decision-making freedom (Spector and McCarthy, 2000).
This fosters an entrepreneurial spirit amongst Nordstrom sales associates, which the company reinforces by providing personalised business cards to all sales staff. Employees also have the freedom to discount an item without approval, and to sell from any department in the store. In fact, Nordstrom’s rule book consists of one page, which reads: “Rule #1: Use your good judgement in all situations. There will be no additional rules”(Collins and Porass, 1994). Nordstrom tends to hire young, university educated professionals.
Although company policy states that every new hire must start at the lowest possible position, new graduates are often happy to do this. In exchange, they have the ability to work autonomously, achieve higher-than-average salaries, and an opportunity for rapid advancement (Weston, 1999). The department managers will generally conduct interviews for their specific areas, with questions centred mainly on goal-setting and customer service skills. Nordstrom also has a strict policy of promoting from within, which allows motivated front line employees, immersed in the Nordstrom Way, to achieve positions of management.
While employee turnover is generally high the first year after recruitment, nearing 50% of total new hires, it drops to less than 25% thereafter (Collins and Porass, 1994). This suggests that new employees quickly judge whether or not they enjoy the strong and demanding Nordstrom culture; those that thrive will continue to do so for a long time thereafter. Walmart: A Cost-Driven Culture Walmart is the world’s biggest retailer, generating $405 billion in worldwide total sales and employing close to 2. 1 million people.
The company was one of the first large retailers to offer profit sharing and stock options to all full-time employees. Walmart also pioneered a system of performance-based incentives, with a bonus structure tied directly to the profitability of each individual store. In fact, Walmart has an expansive benefits package, which includes a health care savings plan, dental insurance, contributions to employee 401k (superannuation), and company discounts for family members of employees. These benefits do not extend to the 30% of Walmart’s workforce that is made up of parttime and casual staff.
Walmart has a policy of internal recruitment, with over 70% of managerial positions offered to current sales associates (Lichtenstein, 2007). Similar to Nordstrom, Sam Walton originally gave his department managers the authority and freedom to run their areas as if they were mini-businesses (Collins and Porass, 1994). In recent years, however, Walmart has implemented much tighter organisational controls; the company’s state of the art back office operations now administers much of the inventory and sales processes.
By some estimates, 98% of all pricing, promotion and stocking decisions are made at Walmart corporate headquarters rather than at the local store level (Lichtenstein, 2007). Above all, Walmart’s everyday low price (EDLP) strategy has been the defining core of the business. Walton’s focus on delivering value to the customer has resulted in a company culture that looks to maximise cost efficiencies at all levels of the organisation. Walmart pays its associates low hourly rates, preferring to make up the difference in benefits (many of which do not have to be paid immediately), and employee overtime is actively discouraged.
In 2006, Walmart decided to cap the pay rates of its veteran workers, in what was seen as an effort to drive out higher paid employees (USA Today, 2006). Store managers are considered integral parts of the Walmart hierarchy. Unlike frontline associates, managers are put through a comprehensive training program and given the ability to triple their $50,000 base salaries through performance bonuses and profit share. Incentives are directly linked to two key performance indicators: higher sales growth and lower wages.
As employee wages are one of the largest contributors to a retailer’s cost structure, Walmart managers are under intense pressure to rein in these expenses. Store managers have some autonomy in determining associate hours and shift allocations, but must frequently report their decisions back to upper management. In fact, Walmart carefully tracks personnel movements in every one of its stores, and uses literally hundreds of metrics to determine the success or failure of each manager’s wage control policies (Lichtenstein, 2007).
Sam Walton frequently voiced doubts over the work ethic of the “educated class” (Walton, 1992), and consequently Walmart does not require potential employees to have any prior qualifications. Applications are to be submitted electronically, either online on the company website, or at kiosks located in the store itself (a cost effective method that reduces time wastage). Young (usually male) associates who display a hard work ethic and devotion to the Walmart ethos are the most likely to be promoted to managerial roles within the company.
However, Walmart staff turnover rates still average 44%, with newly hired associates leaving at an even higher rate of 67% (Peterson, 2005); this far exceeds industry competitors such as Costco at 24%. Comparing Nordstrom and Walmart: a Theoretical Perspective Pay and compensation are important components of the individual human resource cycle (Boxall and Purcell, 2003), and have a direct effect on the AMO (ability-motivation-opportunity) performance equation. Specifically, compensation may alter the motivation of an employee, thereby affecting the direction, intensity and persistence of her efforts (McShane et al, 2010).
The effectiveness of performance-related pay (PRP) consequently depends on the employee’s abilities, and the opportunities within the workplace that she is given to achieve the required standards of performance. Lazear (1999) determines that PRP is most effective when the work is measurable, autonomous, and based largely on the employee’s individual efforts. This is most clearly seen in Nordstrom, which operates a decentralised structure that shifts decision-making to its frontline employees.
Nordstrom employees are recognised for their higher productivity via the SPH metric, and rewarded accordingly. Some commentators have noted that this type of job ownership could also be seen as a form of self-actualisation, the pinnacle of Maslow’s hierarchy of needs (McShane et al, 2010). Herzberg’s two factor theory suggests that the recognition and achievement that Nordstrom employees receive for their efforts are the actual motivators to better performance, while compensation can only act to de-motivate if judged to be insufficient (McShane et al, 2010).
While Walmart attempts to use PRP to motivate its store managers, a high degree of centralised control dilutes the effectiveness of this scheme. Based on these research findings, Walmart would do well to return to its past policies of greater manager empowerment, which would work to increase motivation and a sense of self-achievement. This would then enhance PRP outcomes. Walmart may also be promulgating a company-wide reward/effort imbalance, especially amongst its frontline sales staff.
While the company states it requires high emotional and physical investment from its associates (Walton, 1992), its return investment in them is very low. Frontline employees are expected to work hard and “buy-into” the company culture, but receive below-average hourly wages and few promotional prospects in return. Siegrist’s (1996) model suggests such imbalance leads to negative health outcomes; this may partially explain Walmart’s high staff turnover and steadily increasing absenteeism rate, which had been growing for seven straight years into the mid-2000s (businessmanagementdaily. om, 2006). Linking compensation policies to company performance is not a straightforward exercise, with employee attitudes considered to be the most important causal link (Boxall and Purcell, 2003). Both Nordstrom and Walmart have built strong company cultures that work to influence collective behaviour, which can then affect the actions of individual employees (via the AMO framework). However, there seems to be a large discrepancy in the extent of psychological contract fulfilment between the two management systems and their employees (Grant, 1999).
Walmart displays, at best, a partial contract fulfilment through its compensation and benefit policies. While the company’s rhetoric espouses an egalitarian workplace that is focused on delivering value to both customer and employee, its motivating principle of PRP is limited to store managers who make up a small percentage of the total workforce. Additionally, the company benefits package leaves 30% of its employee base without basic health or dental cover. Overall, both companies display a “best fit” model of HR management, and this extends to the compensation and benefits they offer to their employees.
Shub and Stonebraker (2009) use a theoretical framework of transaction-based versus relationship-based HR management to illustrate the connection between different compensation policies and company strategy. Walmart can be viewed as the archetypical transaction-based company, emphasizing an efficiency of operations that can be attained with minimal HR investment (Shub and Stonebraker, 2009). This system will usually display standardised job design, with low end compensation and few benefits (Shub and Stonebraker, 2009).
A relationship-based company is one which emphasises a long-term investment in their employees, and therefore offers an individualised, high end compensation package with extensive benefits (Shub and Stonebraker, 2009). Nordstrom would very easily fit the mould of this type of company. Both companies have run into issues of “perverse” incentives as a by-product of their performance related pay initiatives. In Nordstrom’s case, the SPH metric leads to many Nordstrom sales staff doing unpaid overtime to complete sales and deliver the superior service that is required of them (for example, doing unpaid customer deliveries after hours).
Walmart’s unwritten policy of no overtime results in sales associates being required to stay back and complete tasks, frequently without pay. Both companies have faced lawsuits in recent times due to the proliferation of these practices. Nordstrom’s compensation and benefits policy has been a contributing factor to the formation of a successful relationship-based organisational structure. Its selective recruitment procedures, higher than average pay, and strong company culture have all been found to have strong correlations with superior company performance and minimisation of PRP perversity (Martell and Carroll, 1995).
Controlling the unintended effects of the PRP system will be a continuing challenge, and Nordstrom would do well to lessen its complete reliance on this compensation mechanism. Introducing some team-based incentives would align with the company’s aim to promote better cultural harmony, and provide a balance to the strictly individual rewards that currently exist. Nordstrom should also be wary of the de-motivating effect of “punishing” those employees who do need reach their SPH targets by reducing them to a base hourly wage.
Walmart faces a tougher task, as its industry niche demands low labour costs. One area the company could improve on is to provide clearer paths for part-time employees to achieve full-time employment, and therefore be eligible for health and other benefits. Lack of benefits is seen as a major de-motivating factor for the part-time workforce. While Walmart is correct to focus on training and compensating its managerial staff, it must also distinguish between transient workers and those frontline associates who wish to make a career with Walmart.
Currently, Walmart compensates both of these very different classes of worker in the same way, which leads to employees becoming unmotivated when their career growth prospects remain unacknowledged. Store manager compensation could be linked to identifying these employees; managers should then be empowered to compensate and train them accordingly. While this may raise wages in the short term, it would work to decrease staff turnover and result in longer term cost benefits. References Boxall, P. & Purcell, J. 2003, Strategy and Human Resource Management Third Edition.
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USA Today, 7 August 2006, viewed 14th August, 2011 http://www. usatoday. com/money/industries/retail/2006-08-07-walmart-pay_x. htm Walton, S. 1992, Sam Walton: Made in America: My Story. New York: Doubleday Weston, H. 1999, ‘Nordstrom: dissention in the ranks? ’ Case study for Harvard Business School, Boston, MA ——————————————– [ 1 ]. Pat (McCarthy) is a real person, please see The Nordstrom Way (p. 5). “Lucy” is a construct example [ 2 ]. Although possibly apocryphal and told in several variations, the “tyre story” is generally accepted to be based on