McDonald’s pay raise helps only a fraction of workforce, may not motivate much
McDonald’s (MCD) has become the latest mega-company to raise the pay of tens of thousands of its workers in a bid to improve customer service, following similar moves by retailers Wal-Mart Stores, (WMT) Target (TGT) and T.J. Maxx owner TJX Cos (TJX).
The world’s largest hamburger chain, which is struggling with sales declines in markets worldwide, notably the United States, said on Wednesday it would pay at least $1 per hour more than the local legal minimum wage for employees at the roughly 1,500 restaurants it owns in the U.S., affecting some 90,000 workers in all, starting in July. The pay increase will lift the average hourly rate for its U.S. restaurant employees to $9.90 and more than $10 by the end of 2016, from $9.01 currently. McDonald’s also will enable workers who have been with the company for more than a year to accrue up to five days of paid time-off annually.
McDonald’s is in the midst of an effort to turn its business around that promises to be labor intensive and require a workforce that is on board.
Last month, new CEO Steve Easterbrook took the helm from Don Thompson, whose two-and-a-half year watch was marked by sliding sales and mounting pressure on the brand. McDonald’s is looking for a comeback by simplifying its menu, which had grown too complex to allow for quick service. More recently, McDonald’s said it was experimenting with all-day breakfast as well as testing out “Create Your Taste,” which lets customers personalize their burger. It also needs workers to be conversant in the benefits of its food as it tries to change the wide-held impression that it’s unhealthy. (Last month it said it would start use only antibiotic-free chicken by 2017.)
McDonald’s had hinted at the need to raise wages in its 2014 annual report, published in February, warning investors that the trend of high wages would hit margins this year. But it has clearly concluded it has little choice.
“We know that a motivated workforce leads to better customer service so we believe this initial step not only benefits our employees, it will improve the McDonald’s restaurant experience,” Easterbrook said in a statement. “Motivated teams deliver better customer service and delivering better customer service in our restaurants is clearly going to be a vital part of our turnaround.”
The Wall Street Journal first reported the news of the pay hike.
In February, Wal-Mart said it would raise the starting salary nearly 500,000 of its workers to $9 an hour in April, and $10 sometime in 2016. CEO Doug MacMillon cited the need to improve customer service in stores and provide workers with a career track. A few weeks later, Target, which needs motivated workers as it adds many high-touch components to its in-store services, followed suit, reflecting that even the market for lower-skills workers is tight now.
But there are two key reasons the pay hike news may have little effect on McDonald’s service.
For one thing, the higher wages still fall well short of the hourly rate many activists have been demanding. Fast Food Forward, a group backed by the Service Employees International Union, has helped organize protests at McDonald’s stores nationwide, demanding a $15 hourly minimum. McDonald’s has said in the past that it relies on the franchising model to “run successful businesses as part of a system that every day creates significant employment, entrepreneurial and economic opportunities across the country.”
Another big impediment is the fact that the bulk of McDonald’s workers won’t benefit. McDonald’s itself only owns 10% of 15,000 or so McDonald’s restaurants in the United States. The remaining 90% of restaurants are operated by individual franchisees whose restaurants employ 660,000 people, according to the International Franchise Association. Workers at those restaurants will not see a wage increase.
McDonald’s often has used its relationship with its franchises as a shield from criticism over pay and working conditions, but in this instance it limits the impact of what the company is touting as good news. In the franchise model that’s particularly prevalent in the fast food industry, franchise owners are responsible for a restaurant’s day-to-day operations, they pay royalties to a corporate overseer and follow the management guidelines that the mother corporation hands down.
McDonald’s and other chains have also used the system to skirt responsibility amid outrage over low worker pay, claiming that they don’t set worker wages; franchise owners do. McDonald’s is under pressure to maintain that stance since its franchising model is currently under close scrutiny by the National Labor Relations Board, which in December 2014 filed labor violations against McDonald’s as a joint employer of workers at franchised restaurants.
So it’s not clear how seeing other workers get a raise will motivate the vast majority of McDonald’s workers psyched to help Easterbrook implement the big changes he has planned.