In its final quarterly earnings report, House Depot forecast flat gross sales and decrease earnings for 2023, partly as a result of shoppers aren’t spending as a lot on house 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 yr to extend hourly wages for each considered one of its frontline employees.

Giving pay raises on the identical time gross sales are slumping looks like an incongruous technique, however House Depot executives challenge that it’s going to truly enhance the big-box retailer’s industry-leading place. “We plan to proceed to seize market share,” CFO Richard McPhail advised analysts through the February earnings name. One purpose, he mentioned, is “the distinctive benefit that our orange-blooded associates give us over our competitors,” alluding to House Depot’s signature coloration and the time period for its frontline workers.

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 yr 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 price of $300 million in 2022. “We all know that these investments result in a extra engaged group and that group 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 finest firms to work for.

In January, Walmart introduced it was elevating the minimal hourly wage for its retailer workers to $14 from $12 and as much as $19 an hour, establishing a mean 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 tough to attract a straight line from the price of labor to gross sales, earnings and market share — and retailers are additionally making large investments in automation — retaining a loyal and happy workforce will be seen as a sensible technique amid an ongoing battle for expertise, and at the same time as persistent inflation and rate of interest hikes are anticipated to additional reasonable what has been strong shopper spending.

Regardless of House Depot’s sturdy monitor report on Wall Road, Morgan Stanley analyst Simeon Gutman mentioned he was considerably stunned by the $1-billion outlay. “The funding group largely thought House Depot was already in prime place when it comes to wage charges,” he mentioned, noting a sequence 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] atmosphere 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 in case you 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 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 rising the variety of managers on the ground at any given time. “It is a significant funding that we imagine will place us favorably within the market,” she mentioned.

“Basically 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 must be in higher positions than mid-size opponents to put money into their labor pressure, Gutman mentioned. “They’re behaving as they need to given the tight labor market, displaying management and never simply interested by a 12-month timeframe. They’re interested by 12 to 36 months.”

The effectivity wage concept

The idea that sustaining a well-compensated, enthusiastic workforce is nice for enterprise is on the coronary heart of what labor economists seek advice from because the effectivity wage concept, which postulates that paying workers 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 clients a compelling purpose to buy at your shops requires giving them actual worth and good service, and that is not potential with out having motivated and empowered workers,” 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 ensure they appeal to and retain the best workers and design their jobs to allow them to be productive and serve their clients nicely. And in a good labor market, it is getting more and more tough to maintain expertise [if] you pay unlivable wages and [offer] few alternatives for progress and success.”

Along with the effectivity wage concept, there’s vital empirical proof that paying low wages hinders workers’ capacity to deal with 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 firms much more than executives might imagine, each financially and competitively.”

It is exhausting 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.”