In its final quarterly earnings report, Dwelling Depot forecast flat gross sales and decrease income for 2023, partly as a result of shoppers aren’t spending as a lot on house enchancment merchandise as they did in the course of 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 yr to extend hourly wages for each one among its frontline staff.

Giving pay raises on the similar time gross sales are slumping looks like an incongruous technique, however Dwelling Depot executives venture 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 in the course of the February earnings name. One purpose, he mentioned, is “the distinctive benefit that our orange-blooded associates give us over our competitors,” alluding to Dwelling Depot’s signature shade and the time period for its frontline staff.

Whereas Dwelling 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 yr in the past February, Goal set a brand new beginning wage vary from $15 to $24 an hour for its so-called workforce members and expanded entry to well being care advantages, at a price of $300 million in 2022. “We all know that these investments result in a extra engaged workforce and that workforce then builds larger visitor belief and loyalty, which in flip continues to energy our progress throughout the corporate,” mentioned Melissa Kremer, chief human assets officer, final fall when Goal was named twelfth amongst Fortune’s 100 greatest 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 progress ambitions,” CFO John David Rainey mentioned at an investor assembly in April. “We’re assured we are able to 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, income and market share — and retailers are additionally making huge investments in automation — retaining a loyal and glad workforce may be seen as a clever technique amid an ongoing battle for expertise, and whilst persistent inflation and rate of interest hikes are anticipated to additional average what has been strong client spending.

No matter Dwelling Depot’s robust observe report on Wall Road, Morgan Stanley analyst Simeon Gutman mentioned he was considerably stunned by the $1-billion outlay. “The funding group largely thought Dwelling Depot was already in prime place when it comes to wage charges,” he mentioned, noting a collection of pay will increase lately. And the truth that the corporate is anticipating less-than-rosy gross sales this yr was one other eyebrow-raiser. “The [home improvement] surroundings appears to be weakening, not accelerating, and due to this fact incremental wage investments at the moment would open the door to extra questions and shock. However should you take a look at Dwelling Depot over a number of years, you are okay with it.”

Ann-Marie Campbell, govt vp of U.S. shops and worldwide operations at Dwelling 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 individual and of their improvement,” she mentioned.

The corporate additionally started the yr with a brand new retailer management construction, creating new administration positions and growing 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 similar to Dwelling Depot, Walmart and Goal which have scale must be in higher positions than mid-size rivals to put money into their labor pressure, Gutman mentioned. “They’re behaving as they need to given the tight labor market, exhibiting management and never simply serious about a 12-month timeframe. They’re serious about 12 to 36 months.”

The effectivity wage principle

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 principle, 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 purpose 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 Faculty of Administration in Cambridge, Massachusetts, who has studied retail operations for greater than 20 years. “Any retailer that desires to win wants to verify they entice and retain the suitable 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 progress and success.”

Along with the effectivity wage principle, there’s vital empirical proof that paying low wages hinders staff’ skill to concentrate on the job and be productive, mentioned Ton, who expounds on this matter in her forthcoming ebook, “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 laborious to say when, and if, Dwelling Depot will see a demonstrable return on the monumental expenditure for its frontline staff. Regardless, CEO Ted Decker mentioned in the course of the February earnings name, “We harken again to … what our founders mentioned: that if we handle our associates, they handle the shopper and every little thing takes care of itself. That is what this funding is all about.”