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Behind the Wal-Mart Memo

November 4, 2005
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Only in America can a company be vilified for having the temerity to suggest that it would be a good thing if it hired healthy workers.

    But that’s what happens if the company in question is Wal-Mart, and when the point about healthier employees is just one suggestion in a larger discussion about how the company can cut rising employee benefit costs.

    It’s easy to beat up on Wal-Mart because it is big and successful, and has gotten that way in large part because of its hard-nosed business practices. As philosopher and basketball legend Wilt Chamberlain once observed, "Nobody roots for Goliath."

    Yes, sometimes it is hard to root for a giant like Wal-Mart, the biggest retailer on the planet, with $285 billion in annual revenue. One thing about having big revenue, however, is that operating costs are equally big. For example, Wal-Mart recently said that its operating costs in the second quarter rose 0.3 percent. That doesn’t sound like much until you realize that for Wal-Mart, a 0.3 percent increase translates into $230 million in additional operating costs.

    Hiring healthier workers is just one suggestion being offered by Susan Chambers, Wal-Mart’s executive vice president for risk management and benefits administration, in her well- publicized memo to the company’s board of directors on how to hold down the growing cost of employee benefits.

    If you haven’t read the entire memo, you should. The document (in two slightly different versions) is available online at WalMartWatch.com and on The New York Times’ Web site, as well as on Wal-Mart’s own site. It is a fascinating look into how even a company as large and successful as Wal-Mart struggles to control benefit costs.

    This is starting to sound like a broken record. Companies everywhere, from Delphi to Delta Airlines, are filing for bankruptcy, discarding pensions and paring benefits in a desperate attempt to try to keep costs down and remain more competitive.

    Some might pooh-pooh this notion as it applies to Wal-Mart, but if you manage a workforce and are concerned about the cost of benefits, it is sobering to read Chambers’ memo. At one point she says:

    "From 2002 to 2005, (Wal-Mart’s) benefit costs grew significantly faster than sales, rising from 1.5 percent of sales to 1.9 percent. Benefits spending grew from $2.8 billion to $4.2 billion during this period, at a rate of 15 percent per year. … A few benefits made up the bulk of this increase: health care ($1.5 billion) grew by 19 percent, paid time off ($1.4 billion) grew by 14 percent, and profit-sharing and the 401(k) program ($740 million) grew by 13 percent."

    And she adds: "Growth in benefits costs is unacceptable (15 percent per year). … Unabated, benefit costs could consume an incremental 12 percent of our profits in 2011,"equal to $39 billion to $35 billion in market capitalization.

    Wal-Mart’s efforts capture the struggle that all of Corporate America is having in trying to control fast-growing health and benefit costs. And the most frightening statistic in Chambers’ memo is this: Only 48 percent of all Wal-Mart employees are covered by the company health plan. That compares with 68 percent of employees who are covered by a health plan at similar national employers. If Wal-Mart even approached that percentage of health care coverage for its workforce, the huge costs highlighted in the Wal-Mart memo would be astronomical.

    "These are indications of the gaps in the health care system that are exposed by Wal-Mart," Len Nichols, a health economist at the New America Foundation, told The New York Times. "You can’t blame Wal-Mart."

    Nichols may be right. Wal-Mart is simply an indicator of a larger problem. Our health care system is at a crossroads, and it is hard to see how Corporate America can continue to foot so much of the bill.

Workforce Management, November 7, 2005, p. 58 -- Subscribe Now!

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