SASB Speaks: Can paying above the minimum wage maximize success in the hospitality industry?

Investors would benefit from the disclosure of comparable data on labor relations

This is the third of SASB’s regular columns on sustainability issues materially affecting companies across sectors.

Public concern about the minimum wage, steady at the federal level at $7.25/hour since 2009, may be reaching an all-time high. After municipalities such as San Francisco, Seattle, Los Angeles, and Washington D.C. announced plans to step up their own increases to $15/hour, both the Republican and Democratic Presidential nominees jumped into the fray, with Hillary Clinton proposing a $12/hour rate and Donald Trump proposing an increase of “some magnitude,” with details left to the states. According to some investors, regardless of the election outcome, the minimum wage issue can’t be ignored.

An employee working full-time at the minimum wage currently earns $15,080 annually. The federal poverty threshold for a single parent with one child is $16,337. Notably, 70% of minimum wage employees are part-time, so they earn even less unless they manage to hold multiple jobs. Indeed, in 2013 when McDonald’s tried to educate its employees on how to live on a budget, the company assumed that its example worker had two jobs, for a total monthly income of $2060. In addition, the example budget allocated only $20/month for health insurance and omitted child care, groceries, clothing, and gas. As a result, McDonald’s goodwill gesture drew criticism and seemed only to highlight the infeasibility of surviving at $7.25/hour.
The implications of the minimum wage debate are of particular concern for hotels, restaurants, cruise lines, theme parks, and other leisure and hospitality companies. Of the 3.3 million workers in the U.S. earning at or below the minimum wage, 55% are in leisure and hospitality. By occupation, 47% are in food preparation and serving positions. In the absence of a federal increase of the minimum wage, companies can make their own strategic decisions on wage and benefit policies. And, investors can consider the implications, both positive and negative, of these choices on the valuation of leisure and hospitality companies.

Higher wages could suggest an upward valuation for several reasons. First, when wages are increased, companies tend to invest more in training employees to improve the customer experience. One study found that as labor costs increased among 258 businesses, the quality of training offered increased by 40%. Also, when the San Francisco Airport implemented a living wage policy, researchers noted increases in productivity, work performance, employee morale, and customer service. At the same time, they found decreases in absenteeism, equipment maintenance, and equipment damage.

Higher wages also have a positive impact on employee retention. In the U.S., the average hotel owner spends 33% of revenues on labor costs and faces an employee turnover rate of 31%. For restaurants, turnover rates exceed 70%. Turnover hurts companies in a variety of ways, including loss of productivity and increased costs for recruitment, selection, onboarding, and training.

Turnover can also hurt company culture, as co-workers’ attitudes over time impact whether a worker leaves or stays. Significantly, researchers found that increased turnover was directly associated with decreased hotel profits. Because of the positive impact on turnover, companies can generally increase wages without significantly increasing prices to consumers and thus hurting revenues.For example, analysis of a proposed increase in the minimum wage from $7.25 to $9.80 per hour found that the cost of an $8 hamburger would increase by only $0.18.
Finally, higher wages could potentially mitigate downside risk. If higher wages signal to restaurant owners and franchisees that the company values its workforce, they may be less likely to cheat workers out of wages and overtime, which can lead to increased liability. In 2016, nearly 10,000 Chipotle workers sued the company for alleged wage theft and McDonald’s paid a $3.75 million fine to settle a federal lawsuit for unpaid wages at its franchises. Also, tens of thousands of workers in 270 cities across the U.S. marched as part of the Fight for $15 movement. Lawsuits and protests can damage a company’s reputation, make it more difficult to attract qualified employees, and potentially increase legal expenses.
Nevertheless, higher wages could suggest downward pressure on a company’s stock price. In the short term, higher wages typically increase labor costs, causing companies to cut staffing levels or replace employees with kiosks and mobile ordering technology. There is mixed evidence on whether raising wages decreases economy-wide employment, which if true could hurt company revenues. For example, fast food establishments in Illinois and Indiana reduced full time employees’ hours by 2.17 hours and part-time employees’ hours by 2.44 hours after a mandated increase in wages. However, a study looking at restaurant workers found that raising the minimum wage even in a recessionary environment did not cause a strong decrease in employment.
For these reasons, investors need to understand how leisure and hospitality companies manage their labor relations, including their process for setting wage rates. However, disclosure of these issues in corporate filings tend to lack transparency and comparability. While companies acknowledge the materiality of labor relations in their 10-Ks, disclosure is often vague and boilerplate; 17 of the top 20 U.S-listed restaurants and hotels do not disclose metrics. Representative, but by no means unique, examples: “If we cannot…retain sufficient numbers of talented associates, we could experience increased associate turnover, decreased guest satisfaction, low morale, inefficiency, or internal control failures” (Marriott 10-K) and “[B]oycotts, protests, work stoppages or campaigns by labor organizations, could adversely affect (including the ability to recruit and retain talent) us or the franchisees and suppliers…whose performance may have a material impact on our results” (McDonald’s 10-K).
Investors would benefit from the disclosure of comparable data on labor relations, including disclosure of metrics such as the percentage of employees earning minimum wage, voluntary and involuntary turnover rates, and the amount of legal and regulatory fines and settlements associated with labor law violations. Using such metrics, they could identify which companies within the hospitality and leisure industry are best managing labor risks and opportunities, and understand how those labor policies align with the companies’ broader strategic goals.

Sonya Hetrick is the Services Sector Analyst for the Sustainability Accounting Standards Board (SASB).