It’s partly a numbers game

Let’s do some math, but first, we need to define some terms.

Expenses and expenditures are two words that can be used interchangeably, and basically it’s money that a company spends. Wages and salaries are expenses. For the sake of simplicity, I’m not going to differentiate between (tax)deductible and non-deductible expenses. Income and revenue are two words that can also be used interchangeably, though revenue typically applies to business income, and that’s the word I’ll be using from here on out.

Profit is all revenue minus all expenses.

According to CNN Money, Wal-Mart posted a total annual profit of approximately $15.7 billion at the end of 2012 on revenues of shy of $447 billion. Wal-Mart employs approximately 1.2 million people. Wal-Mart’s profit per US employee is a little over $13,000. Note: for the sake of simplicity, I’m going to operate on the presumption all numbers are US only.

Wal-Mart is currently the largest target of the calls for a $15/hour minimum wage, the equivalent of $31,200 per year at full time (40 hours per week).

Now a lot of people could live well with an extra $13,000 a year. But if Wal-Mart were to give every employee that kind of raise, it wouldn’t have any profit to roll over into the next year.

A lot of people make the mistake of thinking that profit = cash in the bank, that if you take the sum total of all profits and losses year over year that you have an idea of a company’s bank account balance. Not so. Part of that profit is set aside and used to cover expenses ahead of future revenues, and this includes employment expenses such as salaries and wages. A company’s profitability ensures they have the liquidity necessary to cover expenses when those happen to overtake revenues. For the first quarter or half of a year, that could mean the difference between staying in business and going under.

Plus the profit is typically re-invested into the company across the next year or several years as the company seeks out new markets or areas for business, new ventures to take, expansions of current ventures or within current markets, etc. So stripping away their profit would hurt the company’s ability to do this. Now while many believe Wal-Mart is a market predator, there will always be places where they cannot reliably compete. As an example, while they do have automotive centers, they’re worthless if you need anything more than basic maintenance or small repairs, and you can always get better tires either through your dealer or through one of the many established tire sellers such as Firestone and Goodyear.

But Wal-Mart wouldn’t have been able to venture into basic automotive services without actually having the cash in the bank to venture into that arena. That required remodeling existing stores, to begin with, along with increasing the costs for building and maintaining new stores capable of handling automotive. I assisted in the construction of one such store as a contractor back in 2005.

And their selections on other things tends to be toward the lower-end, to cater to the affordability of those who most shop there. Their most expensive items tend to be electronics, but even those aren’t considered high-end compared to what stores like Best Buy offer.

Wal-Mart takes a lot of flak because they have high profit numbers, again about $13,000 per employee, despite having a modest profit margin, only about 3.5% at the end of 2012.

Let’s do some more math: to pay all of their employees at a minimum $15/hour and employ them at 40 hours each week would cost the company almost $37.5 billion per year, just in wages and salaries – 1.2 million employees * $15/hour * 2080 hours/year = $37,440,000,000 or almost $37.5 billion.

So what if we instead cut the pay of the highest paid in the company? To raise the pay of the employees by just $1 per year – make sure you read that correctly, I said $1 per year – would require reducing the pay of an executive by over $1 million per year. How many people actually think about the numbers before spouting out these ideas. To get an extra $1,000 per employee you’d need to cut $1 billion out of executive pay, presuming they’d be able to retain their executives after doing that, and presuming there is actually that much to cut.

So what if Wal-Mart forgoes the dividend on its common stock and gives that to the employees instead? Wal-Mart would actually lose shareholders and its stock price would plummet. This could actually be good for the corporation itself as it could convert common stock into treasury stock (i.e. common-stock buybacks) at a much lower rate, but that would take cash out of the coffers as well until they decided to turn around and re-issue that stock publicly.

The situation isn’t easy to solve. You can sink Wal-Mart to give their employees a "living wage", thereby risking all of their employees, or force Wal-Mart to cut employees, possibly close stores, to give the remaining employees a "living wage". These are the unintended consequences constantly pointed out to the "living wage" crowd that seems to continually fall on deaf ears (just look at the comments section to any article pointing this out). Prices will go up to offset, at least in part, the increased employment costs. This will cut into the purchasing ability not only of the Wal-Mart customers, but also the Wal-Mart employees, who likely have an employee discount they can exercise as a means of helping get still more of what they need.

The one thing everyone forgets is that the cost of business falls on its customers. And as part of Wal-Mart’s customer base is its employees, it’s a delicate balancing act that can be easily disrupted. But often looking at just the numbers and just saying "they can afford to give up some of that" often is shortcut for "wow that’s a lot of money" without many more brain cells going into thinking it through.

But what seems to take still fewer brain cells to conjure, simply because it sounds good, is the idea that employers must provide their employees with a particular living standard as opposed to merely providing a job.