Wal-Mart Memo Suggests Ways to Cut Employee Benefit Costs

By STEVEN GREENHOUSE and MICHAEL BARBARO
October 26, 2005

An internal memo sent to Wal-Mart's board of directors proposes numerous ways to
hold down spending on health care and other benefits while seeking to minimize
damage to the retailer's reputation. Among the recommendations are hiring more
part-time workers and discouraging unhealthy people from working at Wal-Mart.

In the memorandum, M. Susan Chambers, Wal-Mart's executive vice president for
benefits, also recommends reducing 401(k) contributions and wooing younger, and
presumably healthier, workers by offering education benefits. The memo voices
concern that workers with seven years' seniority earn more than workers with one
year's seniority, but are no more productive.

To discourage unhealthy job applicants, Ms. Chambers suggests that Wal-Mart
arrange for "all jobs to include some physical activity (e.g., all cashiers do
some cart-gathering)."

The memo acknowledged that Wal-Mart, the world's largest retailer, had to walk a
fine line in restraining benefit costs because critics had attacked it for being
stingy on wages and health coverage. Ms. Chambers acknowledged that 46 percent
of the children of Wal-Mart's 1.33 million United States employees were
uninsured or on Medicaid.

Wal-Mart executives said the memo was part of an effort to rein in benefit
costs, which to Wall Street's dismay have soared by 15 percent a year on average
since 2002. Like much of corporate America, Wal-Mart has been squeezed by
soaring health costs. The proposed plan, if approved, would save the company
more than $1 billion a year by 2011.

In an interview, Ms. Chambers said she was focusing not on cutting costs, but on
serving employees better by giving them more choices on their benefits.

"We are investing in our benefits that will take even better care of our
associates," she said. "Our benefit plan is known today as being generous."

Ms. Chambers also said that she made her recommendations after surveying
employees about how they felt about the benefits plan. "This is not about
cutting," she said. "This is about redirecting savings to another part of their
benefit plans."

One proposal would reduce the amount of time, from two years to one, that
part-time employees would have to wait before qualifying for health
insurance. Another would put health clinics in stores, in part to reduce
expensive employee visits to emergency rooms. Wal-Mart's benefit costs jumped to
$4.2 billion last year, from $2.8 billion three years earlier, causing concern
within the company because benefits represented an increasing share of
sales. Last year, Wal-Mart earned $10.5 billion on sales of $285 billion.

A draft memo to Wal-Mart's board was obtained from Wal-Mart Watch, a nonprofit
group, allied with labor unions, that asserts that Wal-Mart's pay and benefits
are too low. Tracy Sefl, a spokeswoman for Wal-Mart Watch, said someone mailed
the document anonymously to her group last month. When asked about the memo,
Wal-Mart officials made available the updated copy that actually went to the
board.

Under fire because less than 45 percent of its workers receive company health
insurance, Wal-Mart announced a new plan on Monday that seeks to increase
participation by allowing some employees to pay just $11 a month in
premiums. Some health experts praised the plan for making coverage more
affordable, but others criticized it, noting that full-time Wal-Mart employees,
who earn on average around $17,500 a year, could face out-of-pocket expenses of
$2,500 a year or more.

Eager to burnish Wal-Mart's image as it faces opposition in trying to expand
into New York, Chicago and Los Angeles, Wal-Mart's chief executive, H. Lee Scott
Jr., also announced on Monday a sweeping plan to conserve energy. He also said
that Wal-Mart supported raising the minimum wage to help Wal-Mart's customers.

The theme throughout the memo was how to slow the increase in benefit costs
without giving more ammunition to critics who contend that Wal-Mart's wages and
benefits are dragging down those of other American workers.

Ms. Chambers proposed that employees pay more for their spouses' health
insurance. She called for cutting 401(k) contributions to 3 percent of wages
from 4 percent and cutting company-paid life insurance policies to $12,000 from
the current level, equal to an employee's annual earnings.

Life insurance, she said, was "a high-satisfaction, low-importance benefit,
which suggests an opportunity to trim the offering without substantial impact on
associate satisfaction." Wal-Mart refers to its employees as associates.

Acknowledging that Wal-Mart has image problems, Ms. Chambers wrote: "Wal-Mart's
critics can easily exploit some aspects of our benefits offering to make their
case; in other words, our critics are correct in some of their
observations. Specifically, our coverage is expensive for low-income families,
and Wal-Mart has a significant percentage of associates and their children on
public assistance."

Her memo stated that 5 percent of Wal-Mart's workers were on Medicaid, compared
with 4 percent for other national employers. She said that Wal-Mart spent $1.5
billion a year on health insurance, which amounts to $2,660 per insured worker.

The memo, prepared with the help of McKinsey & Company, said the board was to
consider the recommendations in November. But the memo said that three top
Wal-Mart officials - its chief financial officer, its top human relations
executive and its executive vice president for legal and corporate affairs - had
"received the recommendations enthusiastically."

Ms. Chambers's memo voiced concern that workers were staying with the company
longer, pushing up wage costs, although she stopped short of calling for efforts
to push out more senior workers.

She wrote that "the cost of an associate with seven years of tenure is almost 55
percent more than the cost of an associate with one year of tenure, yet there is
no difference in his or her productivity. Moreover, because we pay an associate
more in salary and benefits as his or her tenure increases, we are pricing that
associate out of the labor market, increasing the likelihood that he or she will
stay with Wal-Mart."

The memo noted that Wal-Mart workers "are getting sicker than the national
population, particularly in obesity-related diseases," including diabetes and
coronary artery disease. The memo said Wal-Mart workers tended to overuse
emergency rooms and underuse prescriptions and doctor visits, perhaps from
previous experience with Medicaid.

The memo noted, "The least healthy, least productive associates are more
satisfied with their benefits than other segments and are interested in longer
careers with Wal-Mart."

The memo proposed incorporating physical activity in all jobs and promoting
health savings accounts. Such accounts are financed with pretax dollars and
allow workers to divert their contributions into retirement savings if they are
not all spent on health care. Health experts say these accounts will be more
attractive to younger, healthier workers.

"It will be far easier to attract and retain a healthier work force than it will
be to change behavior in an existing one," the memo said. "These moves would
also dissuade unhealthy people from coming to work at Wal-Mart."

Ron Pollack, executive director of Families U.S.A., a health care
consumer-advocacy group, criticized the memo for recommending that more workers
move into health plans with high deductibles.

"Their people are paying a very substantial portion of their earnings out of
pocket for health care," he said. "These plans will cause these workers and
their families to defer or refrain from getting needed care."

The memo noted that 38 percent of Wal-Mart workers spent more than one-sixth of
their Wal-Mart income on health care last year.

By reducing the amount of time part-timers must work to qualify for health
insurance, Wal-Mart is hoping to allay some of its critics.

One proposal under consideration would offer new employees "limited funding" so
they could "gain access to the private insurance market" after 30 days of
employment while waiting to join Wal-Mart's plan.

Such assistance, the memo stated, "would give us a powerful set of messages to
use in combating critics. (For instance, 'Wal-Mart offers associates access to
health insurance after they've worked with us for just 30 days.')"

Steven Greenhouse reported from New York for this article, and Michael Barbaro
from Bentonville, Ark.

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Editorial
Inside Wal-Mart, a Larger Debate

October 28, 2005

After a peek behind the curtain at Wal-Mart, the world's largest retailer, one
thing is certain: the company is listening to its critics. Predictably,
management's responses are about window dressing as much as substantive change,
but there is still a lot we can learn from them.

The week began with a series of unusual announcements from Wal-Mart: it called
on Congress to raise the minimum wage and announced that it would expand health
care access for hourly workers and improve its environmental record. But the
wary applause has died down. An article in The Times on Wednesday described an
internal memo sent to the company's board about plans to hold down the cost of
benefits.

The 26-page memo is required reading for all legislators, business people and
advocates for change in the country's health and retirement systems. Prepared by
the company's executive vice president for benefits with the help of McKinsey &
Company for the Wal-Mart board, this memo injects much-needed honesty into the
national debate over health care and retirement.

At times it can make for difficult reading. It confirms that 46 percent of the
children of Wal-Mart's employees are uninsured or on Medicaid. In their drive
for a healthier and therefore cheaper work force, the drafters recommend adding
physical activity, like rounding up shopping carts, for all employees, simply to
discourage the weak and the sick from seeking jobs there. But it can also be
surprisingly forward-thinking. The internal analysis raises the prospect of
increasing discounts on healthy foods to cut down on obesity among workers and
putting health clinics into stores.

The changes in the Wal-Mart health plan announced on Monday would allow an
employee to see a doctor three times a year for a $20 co-payment per visit and
to receive three generic prescription drugs for $10 each before hitting the high
deductibles that many employees cannot afford. While that may be cold comfort
for those with chronic or serious illnesses, it could help encourage checkups
and preventive care. We cannot blindly throw out the good along with the bad as
we sift through the retailer's dirty laundry.

As a publicly traded company, Wal-Mart has no incentive to spend additional
money on employee benefits. Investors have hammered its share price over the
last year because of rising costs. Wal-Mart's approach is a symptom of economic
forces: cold, logical conclusions based on the set of rules society has given
the company to play by. Wal-Mart is a mirror image of the health care triage
affecting all Americans. It isn't pretty, but we have to look.

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[See also ./walmart_memo.pdf]