The real test of Wal-Mart's $2.7 billion wage investment is about to begin

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Employees at a Walmart in Los Angeles.

Wal-Mart's old bag of tricks just wasn't working anymore.

Over the course of several decades, the world's largest retailer grew into a $400 billion behemoth using two basic strategies as the crux of its playbook. The first of those tactics dated back to Sam Walton's foundation for Wal-Mart in the 1960s: If you charge less than your competitors, shoppers will spend their money at your stores.

The second part of its plan was to build a large network of cavernous stores that were within a few minutes' drive of nearly everyone in America — and at which customers could purchase just about anything they wanted.

And for years, it worked.

Fast forward to the start of the 21st century, however, when Amazon's sales growth regularly topped 25 percent. With the introduction of its subscription Prime service in 2005, shoppers no longer needed to worry about finding the closest store to buy a roll of paper towels — they could buy them online instead. Prices on the website were low, to boot — effectively taking away two of the major advantages to Wal-Mart's business.

Amazon's breakneck growth was one reason why in 2013, Wal-Mart's 2014 fiscal year, comparable sales at its U.S. stores dropped every single quarter.

And so began the reinvention of Wal-Mart.

Under a new leadership team — CEO Doug McMillon joined the retailer in February 2014, followed by U.S. President and CEO Greg Foran six months later — Wal-Mart is finding a new reason for shoppers to come into its stores.

The company shocked Wall Street in 2015, when McMillon announced that his company would invest $2.7 billion over the course of two years to improve its training processes, and give a two-stage, broad-based pay increase to millions of workers. That included boosting their pay to a minimum of $9 an hour, with the promise of moving to $10 in 2016. The idea was that a happier and more motivated workforce would help create cleaner, more customer-friendly stores for shoppers to visit.

But there were caveats to the company's promises — and in true Wal-Mart style, its critics did not keep quiet. Organizations dedicated to workers' rights, some of which are specifically focused on Wal-Mart, argued the raises were still not enough, given the comparatively astronomical salaries of the company's executives.

In the following months, they contended that Wal-Mart was finding new ways to keep its costs low. Those tactics included requiring new hires to complete an exhaustive training program that lasted a minimum of six months before they would be boosted to $10 an hour, they said. The first of the 150,000 employees enrolled in that program will complete it this month.

Still others questioned the content Wal-Mart is teaching its workers, arguing the material it chose to explain economics pushes its corporate views on capitalism. Yet regardless of which side you take, the benefits of Wal-Mart's investments are already showing up on the top line. Since its stumbles in 2013, Wal-Mart has been steadily building momentum, including seven straight quarters of domestic same-store sales gains. That includes a 1 percent lift in the most recent quarter, a time when many of its competitors flailed. And on Monday, the company's shares rose to a 52-week high above $74.

Shoppers are also happier when they visit the retailer's stores. For the past 84 weeks, customers have reported higher satisfaction on their stores' cleanliness, speed and customer service through an internal survey.

And while the investments have taken a significant bite out of Wal-Mart's profits — during the first quarter, its domestic operating income slid 8.8 percent — experts say they could eventually turn into a positive for the company's financials, as they may lead to lower turnover among its employees. That would result in fewer expenses tied to hiring and training.

"The economics can absolutely work out in Wal-Mart's favor if it reduces turnover and increases the average tenure of employees," said Kathy Gersch, executive vice president at Kotter International, a leadership consulting firm.

The path to $10 an hour

Though much of the attention surrounding Wal-Mart's investment has been on its pay increase, both the company and labor experts agree it's just one piece of the puzzle. The other piece is the dramatic changes it's made to its training programs, they say.

The first of these programs, called Pathways, is for its roughly 660,000 entry-level workers. Employees who joined Wal-Mart after the system went live in February are automatically enrolled in the course, which takes between six and 18 months to complete depending on how many hours a week they spend on the computer-based training modules and their role. (Employees who were already with the company are not required to go through the training; Wal-Mart is still evaluating whether these workers will go through it once all of its new hires have completed it.)

The sessions cover topics that are specific to an employees' role — a cashier, for instance, would learn about money laundering — and universal skills such as customer service. They are also taught basic economics including the difference between revenues and profits.

To "graduate" from the program, employees must first complete between six and 18 hours of training (again, depending on their role), which includes compliance. They then move into nine retail modules that take a combined 4 ½ hours to complete. After finishing three modules, the system locks down for six weeks, during which time employees are expected to demonstrate to their supervisors what they've learned while on the job, said Pippa Pomeroy, Wal-Mart's senior director of HR strategy and training.

"We're looking for behavior change," Pomeroy said, explaining the time lag. In the past, Wal-Mart's training was comprehensive, but more akin to a massive "download of information." "We know that the real learning happens when you're out on the sales floor," she said.

After completing the computer-based training, a manager must observe the employee's behavior for at least a week, and up to three. At that time, the manager also reviews the worker's attendance record, which ensures they came to work when they were supposed to, and called in when they were unable. Finally, workers are given a 40-question multiple choice test that covers scenarios they would encounter on a day-to-day basis, Pomeroy said.

Wal-Mart's critics argue that the length of training required to complete the program — and therefore, be bumped to a minimum wage of $10 an hour — is too long for an industry with such high turnover. According to the latest data from the Bureau of Labor Statistics, 4.4 percent of retail workers left their jobs in April, higher than the 3.5 percent average among all industries. That is a very pricey proposition for retailers, as the cost to replace a $10-an-hour retail employee equates to roughly 16 percent of their annual pay, or about $3,328, Gersch said, citing a report by the Center for American Progress. That adds up quickly for a company with more than 660,000 entry-level employees.

"The cost of turnover and hiring and training people is astronomical," Gersch said. "Even if you move that needle a slight bit it's impactful."

Wal-Mart does not release turnover statistics; but industry experts say the program's length may mean many of the people going through Pathways are unlikely to complete it.

"Is it possible Wal-Mart may use the training program to delay [a wage hike]? Anything's possible with Wal-Mart," said Kate Bronfenbrenner, director of labor education research at Cornell University's School of Industrial and Labor Relations.

The danger is that there's potential for Wal-Mart managers to find any reason they see fit to not graduate a student in the program, Bronfenbrenner said. She likened that possibility to a strategy used by Henry Ford back in 1914. While most people remember the automotive executive's bold move to raise his workers' wage to $5 a day, few remember that it came with character requirements. That meant the company could use any reason it liked to decline a worker that higher pay.

"Wal-Mart was very public about touting this $10 an hour that employees were going to be getting at the beginning of the year, but the barriers to getting that $10 weren't as public," said Jess Levin, a spokeswoman with Making Change at Walmart. That group that lobbies for the rights of Wal-Mart workers.

Wal-Mart's Pomeroy emphasized that the length of the program and its subsequent requirements are designed so employees can reap the full benefits of their training, work directly with and build a relationship with a supervisor, and show their higher-ups what they've learned. Bronfenbrenner agreed that there's something to the theory that you can't measure how much a person has absorbed until you see that learning in action.

"As someone who's a teacher ... my giving [students] training doesn't do anything," she said. "It's when they go out in the field and try to do the work, that's when you see it."

Source: Walmart

A screen from Wal-Mart’s Pathways training.

However, that workers learn beyond the basics of the safety requirements and skills necessary for their jobs is questionable, Bronfenbrenner said. As part of the Pathways program, employees are taught basic economic principles including profit, loss and margin. One example is if an item is sold at the register for $1, the company does not profit $1; it simply rang up $1 in revenue.

These additional topics are meant to encourage workers to learn broader retail principles and get them interested in moving forward in the industry, Pomeroy said. She added that the company works closely with a professional education partner to build the program and questions, and runs the content by both its legal team and a performance management specialist to ensure it's relevant and validated.

For Bronfenbrenner, however, the profit versus loss example runs deeper than face value.

"What they're [doing] is trying to teach their employees that they shouldn't be asking for more wages," she said. "They're trying to teach capitalism in a way that justifies what Wal-Mart pays."

The second step in Wal-Mart's training

The retailer's investment in training doesn't stop with its entry-level workers. Through its Academies program, Wal-Mart's department managers and hourly supervisors are likewise sent through a two-week training course as they're hired into the company or put up for promotion. The program is a complete overhaul from its previous method of computer-based learning, and is more in line with how its international markets operate. That includes its U.K.-based Asda stores.

The first three of these training facilities opened in the spring in Carrollton, Texas; and Fort Smith and Fayetteville, both in Arkansas. The company expects to have 90 to 100 of these centers open by the end of the year, with plans to be live nationwide by the end of the second quarter of 2017.

Once the rollout is complete, Wal-Mart expects to have roughly 200 of these locations, which will be attached to an existing store or built as a stand-alone site. All Wal-Mart workers will be within 40 to 50 miles of one of these facilities, said Tom Ward, the company's vice president of central operations in the U.S. They are also compensated for additional travel costs they incur to participate.

Already, some 2,000 people have graduated the two-week program, which caters to new hires, recently promoted managers and people who were already serving in this role (in the latter case, employees go through a shortened program).

Source: Walmart

Similar to Pathways, participants in Wal-Mart's Academies training program spend part of their time on the sales floor and part in the classroom. For example, they could spend the first part of their day out in the store checking whether the shopping carts are properly maintained and put away, and then head into the classroom for a discussion. Teachers are former managers whose only role is teaching at the centers. Each of the Academies, which serve an average 30 stores, requires an additional 15 to 17 employees.

"[They're training in] a real working store with real customers," Ward said.

Unlike Pathways, graduating the Academies program does not translate into an automatic compensation boost for participants. However, once it's fully rolled out, managers would need to complete the program for their title to change.

"Department managers are broadly one of the most important positions we've got in the field because ... they're closest to the shelf edge and the customer," Ward said.

A 'major concession' from Wal-Mart

Wal-Mart's wage increase and investment into training was a "major concession" for the company — and one that was very costly, Cornell's Bronfenbrenner said. She noted that the retailer was even willing to take a hit in lower-income states where there was no chance the local government would have forced it to raise its wage.

Indeed, Wal-Mart's shares took a beating in October when the company detailed the price it would pay on its bottom line. At that time, Wal-Mart slashed its long-term forecasts and said its earnings per share would likely take a 6 to 12 percent hit in its next fiscal year. In the first quarter, the company's net income per share declined 4.9 percent.

Still, some argue that the retailer is finding ways to lessen the blow to its bottom line. One way its doing so is by switching the way it doles out its annual raises, said Levin, of Making Change at Wal-Mart. Whereas the company used to give its best performers a merit raise of between roughly 40 cents and 60 cents an hour, it switched over to a percentage-based increase prior to this February's wage rise, offering a 2 percent lift.

For some associates who were already making more than Wal-Mart's new minimum wage, that meant they received a smaller pay increase this year, Levin said. To reach the former 40 cent raise, an employee would have had to make $20 an hour, she said; yet even after Wal-Mart's wage increase, the average hourly full-time wage for one of the company's workers is $13.38. For someone earning that wage, a 2 percent pay increase would equate to roughly a quarter.

Wal-Mart hasn't yet decided how it will determine its annual raises next year, spokesman Kory Lundberg said.

As the company's stores continue to report better sales and cleanliness scores through its customer surveys, more of them are earning so-called MyShare bonuses. These cash bonuses are given out quarterly to full- and part-time associates who have been with the company for six months (new hires are also required to graduate Pathways to receive a payout). The number of stores that have received this bonus has increased over the past five quarters, and they were given to 99 percent of its stores in the first quarter, Lundberg said. The value of the bonuses hasn't changed, and workers can earn up to $550 a quarter through this incentive, he said.

Yet simply boosting an employee's pay isn't enough to make workers loyal, Kotter International's Gersch said. Instead, the leadership consulting expert said a fair wage is now the standard cost of entry — meaning training initiatives such as the one Wal-Mart is undertaking are an essential second piece of the puzzle. By giving workers more ownership over their roles, they will feel better about their jobs and be more likely to stick around, Gersch said.

"You can't underpay people and expect them to stay, but by the same token you can't think that pay alone is going to keep them," she said.