The Bully of Bentonville

by Anthony Bianco

  The federal case against Wal-Mart began in Honesdale, Pennsylvania. This town of 5,000 is home to store No. 2480, one of 1,000 stores nationwide for which Wal-Mart had outsourced overnight floor cleaning to 100 contractors. In 1998 and 1999, two members of the Honesdale cleaning crew—a Russian and a Slovak—were arrested on charges unrelated to their jobs and found to have overstayed their visas. The Honesdale store manager told local police that he suspected that most of the janitors working the overnight shift lacked proper papers. Even so, Wal-Mart turned to its existing contractor for replacement janitors, who, it turned out, also were illegals.

  The Federal Bureau of Immigration and Customs Enforcement in conjunction with other government agencies launched an investigation from Pennsylvania, and in 2001 agents arrested about eighty undocumented workers, mostly Eastern European, cleaning Wal-Marts in twenty-one stores. Most of the workers were deported, and thirteen contractors pleaded guilty to charges of knowingly employing illegal immigrants. However, no charges were brought against Wal-Mart, which agreed to cooperate with the ongoing Pennsylvania probe as well as a second federal investigation underway out of Chicago.

  One of the guilty middlemen was Stanislaw Kostek of CMS Cleaning, which cleaned more than a dozen Wal-Marts in Pennsylvania, New York, and Virginia. Kostek was a subcontractor to a vendor who supplied about 100 Wal-Mart stores. Kostek said that Wal-Mart paid $10 an hour per worker to his contractor, who paid him $9. Kostek claimed to have paid his janitors $8 an hour, though it probably was closer to $7. He admitted to not paying taxes. “How do you pay workers’ comp if you’re making $1 an hour and you have to cover all expenses?” he demanded. 33

  Afterward, Wal-Mart began phasing out some contractors, reducing the number of stores cleaned by outside janitors to 700 from 1,000. The company told reporters that it had acted not out of concern for immigrant workers or even its legal liability, but because it calculated that cutting out middlemen would save about $66 million. 34

  Wal-Mart’s promised cooperation most likely fell short, however, for the U.S. Attorney for central Pennsylvania authorized the big raid in the fall of 2003. The criminal case against Wal-Mart ended with a whimper a year later with a promise from Wal-Mart to tighten up its “contractor review process” and a payment to the feds of $11 million—not a fine, as the company hastened to point out, but a contribution to support the enforcement of immigration laws and curb exploitation of janitors. “We don’t want these folks to be treated poorly,” said spokeswoman Williams. “We’re spending this money so that folks that do this can’t get away with it.” 35

  Wal-Mart still faced a civil racketeering suit in New Jersey by seventeen of the illegals arrested in the 2003 raids. The class-action suit accused Wal-Mart of conspiring with maintenance contractors to create a criminal enterprise in which janitors not only were underpaid and, in some cases, not paid at all, but also were “physically beat up, unlawfully imprisoned and coerced into continuing to work at Wal-Mart.” 36 In late 2004, the judge in the case conditionally certified it as a class action and ordered Wal-Mart to supply the names and addresses of all janitors who had worked in its American stores since 2000.

  At Wal-Mart, the pressure to dance to Bentonville’s tune only intensifies as an employee moves up off the floor into store management. But at least managers are well compensated for the Darwinian rigors of their employment, giving the ambitious associates plenty of incentive to seek promotion. On average, male store managers in 2001 made $105,682; co-managers $59,535; and assistant managers $39,790. On the other hand, the average sales associate made only $16,526 and cashiers a mere $14,525. (The average for female employees was lower in each category. 37 )

  As Lee Scott tells it, Wal-Mart is the American dream of upward mobility realized. “Every year, thousands of hourly associates are promoted into management and most of these jobs do not require a college degree,” he said. 38 Wal-Mart believes in promoting from within; 76 percent of its store management employees started out as hourly employees. However, the company has been slow to use its vaunted digital database to systemize the awarding of promotions based on merit. An analysis of the voluminous documentation that the company turned over to the plaintiffs in Dukes v. Wal-Mart revealed that promotions are still meted out as they were in Walton’s day: employees—mostly men—simply “tapped on the shoulder” by their bosses and elevated, often over the heads of the women who trained them. 39

  Betty Dukes, the lead plaintiff in the huge sex-discrimination case, is an ordained Missionary Baptist minister who still works as a greeter at a Wal-Mart in Pittsburg, California. Dukes, a middle-aged African American woman, started at Wal-Mart in 1994 as a part-time cashier making $5 an hour. Three years later, she was promoted into a sales associate job, and there her career stalled. As positions came open, they were often filled by male workers of less seniority without having been posted. When Dukes complained that she was being discriminated against, her managers began to write her up for minor offenses such as returning late from breaks. After she was demoted back to cashier, she lodged a complaint with Wal-Mart’s district office. Ignored again, she sought redress in court. “I have no fear in my spirit at all of Wal-Mart,” Dukes said. 40

  Melissa Howard, a fellow plaintiff in the case, achieved what Dukes never did, rising all the way to store manager at the age of twenty-seven. Howard was running a Supercenter in Bluffton, Indiana, when she drove with her district manager and other store managers to Bentonville for a meeting in early 2000. Her colleagues, all of whom were men, stopped three times on the long trip to go to strip clubs. In a complaint later filed in court, Howard alleged that at one club her district manager offered a stripper $50 to join him and Howard in a “threesome out back.” Howard was humiliated but chose not to report the incident to the home office. “I definitely feared retaliation,” she said. “It seemed to me to be an accepted part of the culture.” A few months later, a new district manager came in and demoted her to co-manager. “It honestly still makes me sick to my stomach to think about it,” said Howard, who promptly resigned and filed suit. 41

  While admitting to no wrongdoing or even to shortcomings, Scott responded to the outpouring of criticism of Wal-Mart’s treatment of workers by announcing a series of reform initiatives in 2003 designed to make the company “a corporate leader in employment practices.” Wal-Mart established an Office of Diversity to administer programs to move more women, blacks, and Hispanics into management while equalizing rates of pay. The goal, Scott said, was “to make sure that the percentage of qualified minorities and women we promote is equal to the percentage who apply”—meaning, for example, that if 50 percent of the qualified applicants for assistant manager jobs are women, at least 50 percent of the promotions would go to women. If Wal-Mart fell short of its annual diversity goals, each officer all the way up to Scott would have his or her pay reduced by as much as 7.5 percent in 2004 and by 15 percent beginning in 2005.

  To date, “no Executive Officer’s incentive payment [has been] reduced as a result of the diversity goals,” as Wal-Mart disclosed in its 2005 proxy statement. 42 Was this flawless performance real improvement in the company’s treatment of women and minorities, or does it reflect the softness of its diversity goals? It is impossible to judge from the scant information that Wal-Mart has made public.

  At Wal-Mart’s annual meeting in 2004, Scott got up and effectively declared that Wal-Mart’s computers weren’t a contributing cause of the company’s labor-relations problems, but rather they were a solution. The big brain in the Glass Center now would send an electronic alert to remind cashiers to take their meal breaks. “If the prompt isn’t responded to,” Scott said, “the cash register will shut down because that associate’s lunch is the most important thing.” 43 In addition, new scheduling software would factor in each state’s unique work-hour restrictions. For example, in states that prohibited minors from working past 10:00 P.M., the system would not schedule them past 9:30. Scott announced a third reform, as well: An
y time a store manager added to or subtracted from an employee’s record of hours worked, the employee would be notified of the change and be asked to verify it. (Of course, if an employee is afraid of being fired or retaliated against for refusing to sign off on the officially clocked hours, this change would not help.)

  In response to the question on the tip of every associate’s tongue—“Will I get a raise?”—Scott put forth a new job classification and pay structure, one of such confounding complexity that it could only have been generated by computer. Hourly employees now would be slotted into seven categories, instead of the current four, and have their pay adjusted in the process. “No one’s pay will be reduced as a result of implementing this new structure,” Scott said, “but some associates will receive an increase.” The deserving could look forward to annual raises of as much as 50 cents an hour, he said. “I think we all know how Sam Walton felt about the importance of treating people right.” 44 Store workers in attendance might have turned cartwheels in the aisles if only they could have figured out what Scott was saying.

  Confusion was perhaps the best Wal-Mart could hope for given the underlying reality that its tortuous new pay system betrayed, namely, that the company wanted to create the impression of being more generous to rank-and-file workers without doing anything to jeopardize the big labor-cost advantage that it held over competing retailers. The fact is, “Every Day Low Prices” and Every Day Low Wages and Benefits are flip sides of the same coin. In fact, this irreconcilable conflict between Wal-Mart’s business model and the aspirations of its workers turned the company’s unveiling of a new health benefits plan in the fall of 2005 into a public relations fiasco.

  With only half of its workforce enrolled in the company health plan, because of its high cost relative to employee wages, Scott announced that the changes were designed to “bring insurance within reach of all Associates” by introducing a new “Value Plan.” The monthly premiums of $25 for an individual, $37 for a single parent, and $65 for a family were 40 percent to 60 percent less than those for the current lowest-cost plan. Employees also now could set up a health savings account and make as many as three doctor visits a year with a $20 co-payment before the $1,000 deductible kicked in. Outside experts predicted that Wal-Mart’s unwillingness to cut this $1,000 deductible would cause the company to fall well short of its avowed goal of universal coverage for its employees. “It provides some coverage for people who otherwise are probably not going to have any coverage,” said Alwyn Cassil of the Center for Studying Health System Change. However, in health insurance “you get what you pay for,” she added. “To keep a premium low means you’re going to have less comprehensive benefits.” 45

  A few days after Scott’s announcement, the health plan Wal-Mart had touted as a helping hand extended to its lowest-income employees was exposed as yet another cost-control scheme in a New York Times article based on a leaked internal memo written by M. Susan Chambers, the company’s executive vice president for benefits. “Growth in benefits costs is unacceptable,” wrote Chambers, noting that from 2002 to 2005 the total cost to Wal-Mart of the employee benefits it provided had risen 15 percent a year, to $4.2 billion. “Unabated, benefits costs could consume an incremental 12 percent of our total profits in 2001, equal to $30 billion to $35 billion in market capitalization,” warned Chambers in what was supposed to have been a confidential memo seen only by Wal-Mart’s board members. 46 Chambers laid out various proposals, all intended to slow the increase in benefits outlays without further damage to Wal-Mart’s reputation.

  By Chambers’ analysis, the biggest single problem was health-care costs, which were rising at 19 percent a year, mainly because Wal-Mart employees were sicker than the average American, “particularly with obesity-related diseases,” and also tended to make excessive use of expensive hospital and emergency room visits. “Most troubling,” she wrote, “the least healthy, least productive Associates are more satisfied with their benefits than other segments and are interested in longer careers with Wal-Mart.” Among other things, Chambers proposed that Wal-Mart try to attract a healthier workforce by introducing an education benefit to appeal to students, giving employees a discount on healthy foods, and redesigning the jobs of all store workers to include the gathering of shopping carts or some other sort of physical activity. “It will be far easier to attract and retain a healthier workforce than it will be to change behavior in an existing one. These moves would also dissuade unhealthy people from coming to work at Wal-Mart,” wrote Chambers, who estimated the potential savings to the company at $220 million to $670 million by 2011.

  Rarely has the gap between image and reality—between what Wal-Mart wants the world to believe about it and what the company actually is—been illuminated as starkly as it was by Chambers’ clinically candid memo. “I don’t think the DNA of Wal-Mart has changed at all,” said Mark Husson, an analyst at HSBC Securities. “It’s like a religious cult—it has a low-cost gospel to bring to the country and sees it as a divine duty to do that and nothing is going to get in its way. It will do what it has to do and say what it needs to say to get there.” 47

  AMERICA’S FIRST FAMILY OF DISCOUNTING

  It was a great disappointment to Sam Walton that none of his four children—Rob, John, Jim, or Alice—was willing or able to succeed him as chief executive of Wal-Mart. In fact, Rob, who was named chairman of the company upon his father’s death, was the only member of the next generation to make a career at Wal-Mart. As it has turned out, though, Walton couldn’t have asked for more devoted heirs. Along with their mother, eighty-six-year-old Helen Walton, the four Walton siblings have managed to boost the family’s controlling stockholding in Wal-Mart from 38 percent to over 40 percent by 2005, even as the company has grown enormously. By all appearances, the Waltons also have avoided the internecine disputes that have undermined many a corporate dynasty, and they have collaborated in using the family’s influence to preserve Wal-Mart in their father’s image.

  Today, the Walton family’s stake in Wal-Mart is worth about $80 billion, 1 which is more than the fortunes of Bill Gates and Warren Buffett combined, and more than the total annual economic output of Egypt, a nation of seventy-seven million people. 2 Their dividends alone amounted to $974 million in 2005, 3 or nearly $195 million for each family member. This works out to $533,000 per person per day. In other words, the members of Sam’s immediate family collect more in dividends in each hour of every day—in excess of $22,000 per person—than the typical full-time Wal-Mart associate is paid for an entire year. Even adjusted for inflation, the Walton fortune is on a par with the greatest industrial fortunes in American history.

  By all rights, Bentonville, Arkansas, should have been renamed Waltonville years ago. Wal-Mart remains the biggest employer in town by far, with its headquarters located on a road named for its founder, Sam Walton Boulevard. People who live in Bentonville are likely to work for the Walton family’s company, shop at the Walton family’s stores, have an account at the Walton family’s bank, and read what until recently was the Walton family’s newspaper. Many townsfolk attended Sam Walton Junior High School and send their sons and daughters to day care at the Helen R. Walton Children’s Center. Residents often drive thirty miles south to Fayetteville, where they might take in a lecture at the Sam M. Walton School of Business at the University of Arkansas, take in a play or a concert at the Walton Art Center, or catch a basketball game at the Bud Walton Arena, named after Sam’s brother. To get away from it all, the locals catch a flight at the local airport—after checking in at the Alice L. Walton Terminal Building, named for Sam’s daughter.

  However, Walton sightings are rarer than they once were in Bentonville. As chairman of Wal-Mart, Rob keeps an office at the company, but moved to Colorado some years ago. Alice lives on an enormous ranch in Texas. Helen, the matriarch of the Walton clan, still lives in Bentonville, in the same low-slung creekside house (designed by E. Fay Jones, an accomplished student of Frank Lloyd Wright) that she shared with
her husband. Third-born Jim Walton also lives in town, where he runs Walton Enterprises, the private company that holds the family’s stake in Wal-Mart, from a plain office on the third floor of an unremarkable brick building on Main Street. Jim also oversees the family’s operating businesses, notably Arvest Bank Group and Community Publishers, a publishing chain that until mid-2005 included the two biggest regional newspapers, the Benton County Daily Record and the Northwest Arkansas Times. 4

  John Walton, a former Green Beret who won the Silver Star in Vietnam, died in June 2005 in the crash of an experimental ultralight aircraft near Jackson, Wyoming, where he lived. He was fifty-eight years old and left a wife and a son. Walton, who had worked as a crop duster and a builder of yachts, was the family’s most active philanthropist. His principal interest was the conservative cause of education reform through the use of school vouchers and other taxpayer-financed incentives to aid private school attendance. A longtime Wal-Mart director, John was replaced on the board by his brother Jim.

  Even before John’s death, the Walton family suffered its share of trial and tribulation. Jim is the only one of Sam’s children not to be divorced; Rob is now separated from his second wife. Alice struck and killed a pedestrian with her car in 1989, and she was convicted of drunk driving in 1998 after crashing her Toyota 4Runner into a gas meter. Car accidents seem to run in the family: A year later, Helen Walton was badly injured when she drove her Chrysler into a dump truck, according to witnesses, after running a red light. 5 More recently, one of Bud Walton’s granddaughters, Elizabeth Paige Laurie, was kicked out of the University of Southern California after it was learned that she had paid a classmate $20,000 over three years to do most of her work for her.