Henry Ford carsWalmart (WMT) employees across the country are picketing their employer right now, asking to be paid living wages and to be given decent health care coverage. And while they have a genuine bone to pick, their problem is not to unique to Walmart.

Since 2000, corporate profits have jumped 80%, while real compensation has risen just 8%, and the real median family income has dropped 5%.

The money's flowing somewhere -- but not to most of us.

This is doubly frustrating because it traps us in a vicious cycle. Because consumer spending drives nearly 70% of the economy, we need consumers to spend their paychecks for GDP to grow. Yet consumers can't increase spending if their income isn't growing.

What America's big companies -- especially Walmart -- need right now are people like Henry Ford in charge.

One of the Greatest Business Decisions of All Time

Henry Ford is famous for mass-producing the automobile with an assembly line. But the part of his legacy we should be looking back to and learning from today was born in 1914 -- one year after his assembly line's implementation.

This was when he effectively doubled his workers' pay to $5 a day, a move Fortune magazine recently declared one of "the greatest business decisions of all time."

Some folks then and now misinterpreted this move as an act of charity on his part. But what actually motivated Ford was profit.

At the time, employee turnover at Ford (F) was high (similar to Walmart today, where 70% of employees hired leave within the first year). And no wonder -- completing the same task over and over again on an assembly line is boring.

This left the company with the ever-growing expense of recruiting, interviewing, and training new employees to fill their shoes. By doubling employee pay, he successfully convinced employees that working on the line wasn't so bad after all ... at least not while making twice what they'd make elsewhere.

The move -- which cost nearly $10 million at the time to implement -- became "one of the finest cost-cutting moves we ever made," according to Ford himself. Productivity jumped and employee turnover dropped from 370% to just 16%.

And a Consumer Revolution Began ...

This doubling of Ford's workers' wages had tangential effects on the rest of the American economy.

Most obviously, he increased his employees' discretionary spending.

He was also able to pass savings on to consumers with lower automobile prices. The cost of a Model T dropped 10% each year from 1914 to 1916 (while Ford's profits doubled to $60 million). This in turn saved the general consumer more money that they could then spend elsewhere.

It Could Work Today, Too

This is a plan that doesn't rely on the government raising the minimum wage. It's also not a cure-all move that would or could work with every company.

But raising employees' salaries is a proven money-saving tactic that more CEOs should consider today, especially where employee turnover is ridiculously high -- as it is at Walmart.

Adding more fuel to this argument is the fact that despite the fact that Walmart is the third-largest company in the world on a revenue basis (earning more than $15 billion profit each year), and has a CEO whose compensation for two or three hours is more than his average employee earns in a year), "as many as 80% of workers in Wal-Mart stores use food stamps," according to Daily Kos. All told, according to Daily Kos, "Wal-Mart's employees receive $2.66 billion in government help every year."

So a move by Walmart to raise wages would improve their employee's lifestyle, boost its profit margin (as turnover and the costs associated with it would fall), all while lowering government entitlement spending.

Looks like a win-win -- and it's as simple as Walmart's CEO Mike Duke taking a page from Henry Ford's playbook.

This article was written by Motley Fool analyst Adam J. Wiederman.




Increase your money and finance knowledge from home

Professional Vs Do it Yourself Investing

Should you get advice or DYI?

View Course »

Basics Of The Stock Market

Stock Market 101 - everything you need to know but were afraid to ask!

View Course »

Add a Comment

*0 / 3000 Character Maximum

59 Comments

Filter by:
puzzleguy1

What a great history lesson referencing H. Ford. What Ford did by bumping his workers' salary came to be known as ":The circle of virtue", and later, "the multiplier effect" because that salary increase eventually led to more cars, more drilling to meet the increased demand for gas/oil, more gas stations, an upgrade in our roads and highways and countless jobs as a result. Ford practiced DISTRIBUTIVE CAPITALISM in contrast to Mittens who seeks to concentrate as much wealth as possible at the top. That kind of INequality is what is helping to kill our country and the middle class.

October 22 2012 at 2:34 PM Report abuse rate up rate down Reply
svizzera83

Wal-mart has great health coverage. I work for the company and I know all those complains about not having good coverage are lies.

October 21 2012 at 12:26 AM Report abuse rate up rate down Reply
Truwriter

Its silly to think of Wal Mart jobs as careers. Are the clerks at the 7/11 career people needling unions? Wal mart jobs are two types, people working there to have an income to train or seek better employment. Wal Mart jobs are super for working while in college. The other is people who had failed to finish high school, or who have bad work records, etc, to find a job. If they work there for their whole lives than its their choice and part of choices they have made in their lives. Wal Mart clerk jobs are not lifetime careers. Unions would love to have them because there are a lot of Wal Marts and a lot of those kinds of employees. The goal being to find a new group of people to be in the union since they crushed the businesses they unionized before. Unions can protect skilled workers in regard to illegal firings, possibly. Job safety and illegal dismissal are all covered by labor laws, making unions a moot point. And spare me the rich guy rant, business is created by money people, not unions. Unions don't create jobs and often lose them. Too, lets remember while doing the rich guy rant that Bill Clinton was bought and paid for by Sam Walton who made him Gov of Arkansas and President and after Bill left office he and Hillary were well paid Board of Director members of the Wal Mart corporation. Unions need to try not to kill jobs if they wish to get those monthly dues from workers. We have to have workers first you now. And Obama/Clinton have done more damagedwith overseas movement of business than any other politicians. Don't worship politicians and read more and chant less.

October 19 2012 at 11:00 AM Report abuse rate up rate down Reply
Mac

Greed!! Someone said that wealth is like the drug "crack"....you can NEVER have enough and from the evidence, I'd say that this person nailed it. Wealth buys power and whoever has the power determines the laws in this land. Most Corporate Giants are infected by the "greed bug". They want it all and they will not share...not even with the employee's who made it possible, unless the Law forces them to. This is the reason for Unions! Without them, companies would regress back to a time when workers were treated almost like slaves. They had no rights and were forced to work as long as they were told and then accepted whatever wages the "boss" felt like dishing out. This is the EXACT reason that employers move overseas. It isn't politics, it's greed because in most cases, third world countries, ever grateful for American companies to move in, will allow their workers to be treated in whatever fashion the company desires. Low pay, workers dormitories and usually very few benefits if any are the norm. This way the company can make enormous profits as they ship their products back here for Americans (whom they refuse to hire) to purchase. Read the clothing labels in any Wal Mart and see for yourselves.

October 19 2012 at 9:42 AM Report abuse rate up rate down Reply
1 reply to Mac's comment
t_trevor1

Mac, I feel sorry for pitiful incompetents like yourself whose stupidity forces you to be "treated almost like slaves" even though you are free to sell your labor to another employer at any time.

Most of us in the workforce realize the employee/employer contract requires two willing parties who voluntarily agree to transact. And if we don't like the bargain being offered, we have the brain cells necessary to decline the agreement.

I'm guessing at this point there is no cure for your stupidity. But it's not your employer that makes you incompetent. You did that all by yourself!

October 19 2012 at 8:24 PM Report abuse rate up rate down Reply
zzcog

What a bunch of BS. Walmart provides employment for people that want to work at Walmart. If they don't want to work at Walmart go to work someplace else! Last time I looked people were not chained to their scanners. Get some education and little bit of ambition and better your life. If Walmart is all you are qualified to do then accept it, if not get out! This is a competive world we live in and Walmart has to compete, last time I checked they are not a charitable organization.

October 19 2012 at 9:11 AM Report abuse -1 rate up rate down Reply
1 reply to zzcog's comment
t_trevor1

Dumbest 1%ers despise a meritocracy. Given their stupidity, I suppose you can't realy blame them,

October 19 2012 at 8:25 PM Report abuse rate up rate down Reply
Riccardo

Henry Ford was a mass producer not a retailer....He would have failed miserably

October 19 2012 at 8:43 AM Report abuse -1 rate up rate down Reply
kll927

Iselin007. Thats what were doing now !!!

October 19 2012 at 4:13 AM Report abuse rate up rate down Reply
Iselin007

Where you going to live on part time low wages in you 60's?

October 19 2012 at 3:40 AM Report abuse rate up rate down Reply
Iselin007

Be positive all you want the carpet baggers swindled every dollar they could take an none of that cash is coming back to this country.

October 19 2012 at 3:38 AM Report abuse rate up rate down Reply
Iselin007

In good times older people can't find jobs shows you what a joke these politicians are.

October 19 2012 at 3:26 AM Report abuse rate up rate down Reply