In its final quarterly earnings report, House Depot forecast flat gross sales and decrease earnings for 2023, partly as a result of customers aren’t spending as a lot on residence enchancment merchandise as they did through the pandemic, a boon interval for the sector. One other hit to its backside line, the corporate predicted, was the choice to take a position $1 billion this 12 months to extend hourly wages for each considered one of its frontline employees.

Giving pay raises on the similar time gross sales are slumping looks like an incongruous technique, however House Depot executives undertaking that it’ll really increase the big-box retailer’s industry-leading place. “We plan to proceed to seize market share,” CFO Richard McPhail informed analysts through the February earnings name. One cause, he mentioned, is “the distinctive benefit that our orange-blooded associates give us over our competitors,” alluding to House Depot’s signature colour and the time period for its frontline staff.

Whereas House Depot made a splash with the billion-dollar pay hike, it comes on the heels of comparable strikes by different main retailers that additionally espoused the advantages of investing in a well-paid workforce.

A 12 months in the past February, Goal set a brand new beginning wage vary from $15 to $24 an hour for its so-called group members and expanded entry to well being care advantages, at a value of $300 million in 2022. “We all know that these investments result in a extra engaged group and that group then builds better visitor belief and loyalty, which in flip continues to energy our development throughout the corporate,” mentioned Melissa Kremer, chief human sources officer, final fall when Goal was named twelfth amongst Fortune’s 100 finest corporations to work for.

In January, Walmart introduced it was elevating the minimal hourly wage for its retailer staff to $14 from $12 and as much as $19 an hour, establishing a median wage of $17.50 an hour. “Retaining expertise and establishing profession alternatives for our associates stays a central goal to our development ambitions,” CFO John David Rainey mentioned at an investor assembly in April. “We’re assured we will make the investments wanted to stay aggressive in a good labor market whereas additionally rising our profitability.”

Though it is troublesome to attract a straight line from the price of labor to gross sales, earnings and market share — and retailers are additionally making massive investments in automation — retaining a loyal and glad workforce might be seen as a clever technique amid an ongoing battle for expertise, and at the same time as persistent inflation and rate of interest hikes are anticipated to additional average what has been strong shopper spending.

Regardless of House Depot’s sturdy monitor report on Wall Avenue, Morgan Stanley analyst Simeon Gutman mentioned he was considerably shocked by the $1-billion outlay. “The funding group largely thought House Depot was already in prime place by way of wage charges,” he mentioned, noting a collection of pay will increase in recent times. And the truth that the corporate is anticipating less-than-rosy gross sales this 12 months was one other eyebrow-raiser. “The [home improvement] setting appears to be weakening, not accelerating, and subsequently incremental wage investments presently would open the door to extra questions and shock. However if you happen to have a look at House Depot over a number of years, you are okay with it.”

Ann-Marie Campbell, govt vp of U.S. shops and worldwide operations at House Depot, says the rise in wages is only one part of the funding story in associates. “We all know that the important thing to an engaged and dedicated workforce is investing within the particular person and of their improvement,” she mentioned.

The corporate additionally started the 12 months with a brand new retailer management construction, creating new administration positions and rising the variety of managers on the ground at any given time. “This can be a significant funding that we imagine will place us favorably within the market,” she mentioned.

“Primarily what they’re doing is reinvesting in a key aggressive benefit of their enterprise mannequin, which is service inside their shops,” mentioned Brian Nagel, an analyst with Oppenheimer.

Market leaders comparable to House Depot, Walmart and Goal which have scale ought to be in higher positions than mid-size opponents to spend money on their labor pressure, Gutman mentioned. “They’re behaving as they need to given the tight labor market, displaying management and never simply desirous about a 12-month timeframe. They’re desirous about 12 to 36 months.”

The effectivity wage concept

The idea that sustaining a well-compensated, enthusiastic workforce is sweet for enterprise is on the coronary heart of what labor economists confer with because the effectivity wage concept, which postulates that paying staff larger than minimal wages will increase productiveness, retention charges and loyalty. That, in flip, is mirrored in buyer satisfaction and goodwill versus the competitors.

“Offering prospects a compelling cause to buy at your shops requires giving them actual worth and good service, and that is not doable with out having motivated and empowered staff,” mentioned Zeynep Ton, a professor at MIT Sloan College of Administration in Cambridge, Massachusetts, who has studied retail operations for greater than 20 years. “Any retailer that wishes to win wants to verify they appeal to and retain the correct staff and design their jobs to allow them to be productive and serve their prospects nicely. And in a good labor market, it is getting more and more troublesome to maintain expertise [if] you pay unlivable wages and [offer] few alternatives for development and success.”

Along with the effectivity wage concept, there’s important empirical proof that paying low wages hinders staff’ skill to concentrate on the job and be productive, mentioned Ton, who expounds on this subject in her forthcoming e book, “The Case for Good Jobs.”

“It additionally drives turnover and attendance issues,” she mentioned. “The underside line is that worker turnover and low pay value corporations much more than executives might imagine, each financially and competitively.”

It is onerous to say when, and if, House Depot will see a demonstrable return on the monumental expenditure for its frontline employees. Regardless, CEO Ted Decker mentioned through the February earnings name, “We harken again to … what our founders mentioned: that if we maintain our associates, they maintain the shopper and every thing takes care of itself. That is what this funding is all about.”