In the late 1940s, when Sam Walton was franchising a Ben Franklin's
variety store in Newport, Ark., he had a simple but momentous idea.
Like any retailer, Walton was always looking for deals from suppliers.
Typically, though, a retailer who managed to get a bargain from a
wholesaler would leave his store prices unchanged and pocket the extra
money. Walton, by contrast, realized he could do better by passing on
the savings to his customers and earning his profits through volume.
This insight would form a cornerstone of Walton's business strategy
when he launched Wal-Mart in 1962.

The quest for low prices came naturally to Walton: He was freakishly
cheap. Although he was ranked as the richest man in the United States
by the 1980s, he continued, it is said, to have his hair cut by the
local barber, a $5 expense that he never supplemented with a tip.
(Perhaps he wasn't satisfied.) Cost-cutting was, as one might also
expect, an obsession in the Wal-Mart culture, and Walton was almost as
chintzy with his executives as he was with his cashiers. On business
trips, everyone, including the boss, flew coach, and hotel rooms were
always shared. Even a cup of coffee at the office required a 10-cent
contribution to the tin.

But coffee taxes only went so far. Walton understood that a major
requirement for keeping costs down was controlling the payroll. As he
would write in his 1992 autobiography, Made in America, "No matter how
you slice it in the retail business, payroll is one of the most
important parts of overhead, and overhead is one of the most crucial
things you have to fight to maintain your profit margin." Not only did
Walton prefer to hire as few people as possible, but he also dreaded
paying them more than he had to. Unions were particularly feared, and
Walton did everything he could to fight them, almost always
successfully.

If such a regimen seems stifling, Walton's employees nevertheless
accepted it. In part, it was because Walton framed his cheapness as a
crusade on behalf of the lowly consumer and as a quest for a better
life for all Americans. It was also because he lived an outwardly
modest life, driving an old truck with his hunting dogs in the back.
Mostly, it was because he had charisma. Even when Wal-Mart grew
outsized, Walton made a point of keeping in touch with his employees on
the ground or, as he termed them, his "associates." This would often
involve flying from store to store -- Walton had a pilot's license --
for impromptu visits.

But Walton's ability to keep his staff happy also relied on a sense
of when to let penny-pinching take a backseat to other priorities. In
1985, amid anxiety about trade deficits and the loss of American
manufacturing jobs, Walton launched a "Made in America" campaign that
committed Wal-Mart to buying American-made products if suppliers could
get within 5 percent of the price of a foreign competitor. This may
have compromised the bottom line in the short term, but Walton
understood the long-term benefit of convincing employees and customers
that the company had a conscience as well as a calculator. He also made
sure to give his staff a stake in the company. In 1971, he introduced a
profit-sharing plan that allowed employees to put a certain percentage
of their wages towards the purchase of subsidized Wal-Mart stock. For
employees who stuck around, this could mean quite a bit of money.
According to a truck driver named Bob Clark, quoted in Walton's
autobiography: "[Walton] said, 'If you'll just stay with me for twenty
years, I guarantee you'll have $100,000 in profit sharing' ... Well, last
time I checked, I had $707,000 in profit sharing, and I see no reason
why it won't go up again."

Equally important was Walton's ability to sell employees on the
notion that working at Wal-Mart meant limitless opportunity. Here, from
Fortune, is a portrait of Walton at a Saturday-morning meeting in 1989:

[Walton] proposes that whenever customers approach, the associates
should look them in the eye, greet them, and ask to help. Sam
understands that some associates are shy, but if they do what he
suggests, "It would, I'm sure, help you become a leader, it would help
your personality develop, you would become more outgoing, and in time
you might become manager of that store, you might become a department
manager, you might become a district manager, or whatever you choose to
be in the company...It will do wonders for you." He guarantees it.

And things could get downright cultish:

Then, just to make
sure, Sam asks the associates to raise their right hands and execute a
pledge, keeping in mind that "a promise we make is a promise we keep."
The pledge: "From this day forward, I solemnly promise and declare that
every customer that comes within ten feet of me, I will smile, look
them in the eye, and greet them, so help me Sam."

Of course, Wal-Mart's success relied on more than just charisma and
thrift. Technology, in particular, put the company ahead of its
competitors. Already by the 1970s, Wal-Mart was using computers to link
its stores and warehouses. Sales data allowed Wal-Mart to keep track of
specific items and reduce inventory miscalculations. Only years later
would Kmart realize how far it had fallen behind. Throughout Walton's
career, a focus on innovation of this sort would make Wal-Mart a
consistent leader in efficiency.

When Walton died in 1992, the adjustment to a post-Sam environment
proved difficult. Although Wal-Mart executives had emphasized for years
that their company depended on a set of principles and habits more than
it did on any one person, Walton's death wound up marking a fateful
shift in how the company was perceived.

The first blow fell only months later when "Dateline NBC" produced
an exposé on the company's sourcing practices. Although Wal-Mart's
"Made in America" campaign was still nominally in effect, "Dateline"
showed that store-level associates had posted "Made in America" signs
over merchandise actually produced in far away sweatshops. This sort of
exposure was new to a company that had been a press darling for many
years, and Wal-Mart's stock immediately declined by 3 percent. While
the "Dateline" flap was short-lived, Wall Street soon found other
reasons to lose faith in the company. Profit margins were declining,
yet David Glass, who was Wal-Mart's CEO at the time, chose to make
ambitious investments in distribution, technology, and construction.
Such risk-taking, while smart, scared off investors at the time, and,
by 1996, Fortune was even mocking the company's "everyday low stock
prices." It was no longer the feisty little chain out of Bentonville.

But it wasn't just Wal-Mart's image that began to change after
Walton's death. It was also the way the company did business.
Wal-Mart's new leaders took to heart one element of the founder's
business philosophy -- the importance of reducing costs -- but they
didn't show his intuition about the importance of making employees feel
as though they had a stake in the company. They were already at a
disadvantage as it was. Wal-Mart's rate of growth was impressive but
slower than in its early years -- the inevitable result of becoming so
big -- and this weakened the appeal of such incentives as stock
ownership. But character also played a role. The company's focus on
saving money was leading it to make unrealistic demands of local
managers, particularly with regard to payroll, and this pressure would
eventually lead to serious trouble.

For a while, though, it worked. Between 1997 and 2001, the company's
stock value increased by over 500 percent, rising by 70 percent in 1997
alone. This undoubtedly helped to mollify employees who'd been unhappy
with the slump earlier in the decade. Between 1996 and 1999, sales
increased by 78 percent while inventory rose only 24 percent, a feat
Fortune lauded as "mind-bending." Today, with $288 billion in annual
revenues (more than Switzerland's GDP) and over $10 billion in profits,
Wal-Mart is the world's largest corporation, according to 2005 Fortune
500 list. It operates over 5,000 stores worldwide and employs over 1.6
million people -- 1.3 million in the United States alone.

That growth has been accompanied by two distinct kinds of
perceptions among the public. On the one hand, Wal-Mart has been
celebrated for its business innovations, which have set a new global
standard for efficiency. On the other, it has been condemned for its
hard-charging business practices. One of the most prominent attacks
came last November, when filmmaker Robert Greenwald released Wal-Mart:
The High Cost of Low Price, a documentary that excoriated the company
for its approach to unions, independent retailers, outsourcing, and
wages and benefits.

Washington, too, has gotten involved. In 2003, in the run up to the
primaries, Democrats began to make an issue of Wal-Mart's wages and
benefits. In 2004, Rep. George Miller of California released a report
called "Everyday Low Wages: The Hidden Price We All Pay for Wal-Mart."
And last year, organized labor put together two Washington-based
groups: Wake Up Wal-Mart, backed by the United Food and Commercial
Workers (UFCW), and Wal-Mart Watch, supported by the Service Employees
International Union (SEIU). Staffed by prominent veterans from the
campaigns of Howard Dean and Wesley Clark, both groups are devoted to
keeping the world, and Washington, informed of Wal-Mart's alleged
misdeeds. For many progressives, the fight to change Wal-Mart
represents a central organizing challenge for the 21st century.

There's evidence that the bad press has taken a toll on the company.
A 2004 report prepared for Wal-Mart by McKinsey and Co. found that up
to 8 percent of Wal-Mart customers no longer shop there because of
"negative press they have heard." For the last two Christmas shopping
seasons, the company has reported lower-than-expected sales. And in
January, Maryland gave final approval to a "Wal-Mart bill," requiring
large employers to spend at least 8 percent of their payroll on health
benefits. Thirty other states are now considering similar bills.
Developments of this sort have led the company to form a war room of
political PR experts from both parties -- including Ronald Reagan's
image-meister Michael Deaver, and Leslie Dach, a media consultant to
Bill Clinton -- to generate more positive media coverage.

Wal-Mart's defenders argue that the chain saves lower-income workers
billions through its low prices. This is undeniably true, but it's not
a virtue unique to Wal-Mart. The entire sector of discount retailers --
from Target to Costco to Best Buy to Home Depot -- does much the same
thing. Meanwhile, Wal-Mart's critics tend to focus on the company's low
wages and paltry benefits, or its effect on small towns, or its
reliance on outsourcing. But these, too, are by and large sins of the
entire discount retail sector. So why pick on Wal-Mart?

The answer is that Wal-Mart really is different. In terms of annual
revenue, Wal-Mart is nearly four times the size of The Home Depot, the
country's second largest retailer, and almost twice the size of Target,
Costco, and Sears (which includes Kmart) combined. That means the
company exerts pressure on the entire sector to imitate its methods --
including its treatment of workers. That would be less worrisome if
Wal-Mart's record didn't stand out within the sector. But there are
strong indications that, when it comes to how it treats its employees,
Wal-Mart really is worse than the rest. The company finds itself in
trouble because, since the death of Sam Walton 14 years ago, something
ugly has happened to the way it does business.

Work off the clock

In a comparison of Wal-Mart with its peers, the obvious place
to start would be wages and benefits. But neither Wal-Mart, Target, nor
Costco make public their median wage, which many economists argue is
the most accurate measure of how a company pays its employees. A 2005 study
(pdf) by Arindrajit Dube and Steve Wertheim of the University of
California's Berkeley Labor Center, however, sheds some light. Using
figures for Wal-Mart released through a sex-discrimination lawsuit, and
relying for the rest of the large retail sector on numbers from the
March 2005 "Current Population Survey," the study finds that Wal-Mart
pays its hourly workers an average hourly wage of $9.68, while other
large retailers average $11.08. (The study adjusts for the fact that
Wal-Mart stores tend to be in lower-income areas.) As for health
benefits, Dube and Wertheim found that Wal-Mart offers its hourly
workers benefits worth 73 cents per hour, while other large retailers
offer $1.

The study suggests that Wal-Mart is significantly less generous than
other large retailers. In response, Wal-Mart has noted that the
Berkeley Labor Center receives 10 percent of its funds from organized
labor. The company instead cites a study that it commissioned from the
consulting group Global Insight, which found that Wal-Mart's wages are
on par with those of other retailers. But whichever study comes closer
to the truth, comparisons between Wal-Mart and the large retail sector
as a whole don't tell the full story. After all, discount retailers
like Wal-Mart will inevitably pay less than many other large retailers,
and why shouldn't they? Doing so allows them to offer lower prices.
Only by focusing exclusively on other discount retailers like Costco
and Target can we meaningfully compare Wal-Mart's wages and benefits to
those of its competitors, but we simply lack the hard data on most
other outlets to do this.

But there are myriad other ways that employers can cut costs at the
expense of workers. And it's in these areas that we can gather more
satisfactory information to compare Wal-Mart to its competitors. The
simplest way to save money is to avoid paying people for all the hours
that they've worked -- a practice called off-the-clock work. Of course,
Wal-Mart can't explicitly force employees to work off-the-clock. But it
can set payroll targets that are nearly impossible to achieve without
doing just that. As one manager explained to The New York Times
in 2002, "You got to hit the payroll budget they set for you, but if
you're over, they discipline you." Plausible deniability, then, becomes
essential. Workers get assigned more work than they can possibly
complete on their shifts -- while being warned that overtime is out of
the question. No intelligent employee would fail to get the message:
Finish the job by whatever means necessary. "We worked off the clock
pretty much every shift," one employee told the Times. "The manager
said if our jobs were not finished, we had to clock out and finish our
jobs so no overtime would show up."

Wal-Mart insists that these cases are unrepresentative of the
company as a whole, and that any enterprise of their size is bound to
have a few rogue managers. But the verdicts so far suggest a widespread
problem. In 2000, Wal-Mart paid $50 million to settle an off-the-clock
suit involving 69,000 Wal-Mart employees in Colorado. Two years later,
a federal jury ordered Wal-Mart to pay back wages to 83 workers in
Oregon for off-the-clock work. Some 40 similar class actions are
pending, and in 2002, The New York Times reported on a
"wide-ranging legal battle between Wal-Mart and employees or former
employees in 28 states" over off-the-clock work. Last December, a
California jury awarded $172 million to thousands of Wal-Mart employees
who had been illegally denied lunch breaks.

Free-market advocates who defend the company argue that squeezing
workers is an unavoidable reality of the discount retail business. But
a look at the annual reports of Wal-Mart and its competitors points up
a glaring difference between the companies. Target's and Costco's
annual reports for 2004-2005 include no cases of off-the-clock work.
Wal-Mart's lists 44 in the last 10 years.

No girls allowed

In 1986, Walton was sensing some pressure to appoint a woman
to Wal-Mart's all-male board. So he offered the job to Arkansas' first
lady, one Hillary Clinton, who accepted. She would later quote Walton's
pitch: "I think I need a woman; would you like to be her?" Today,
Wal-Mart's challenges in the field of gender equality are not so easily
addressed. The company keeps its payroll costs down by paying women
less than their male counterparts for performing the same work.
Evidence also exists that it fails to promote women at the same rate as
men.

In 2000, a female employee at a California Wal-Mart who found
herself denied promotions filed a sex-discrimination suit. That case
now involves nearly two million women, and, in 2004, it was certified
by Judge Martin J. Jenkins, of the United States District Court in San
Francisco as a class action. Discrimination is a difficult thing to
prove, but the figures in the case do not look good. According to
numbers compiled in 2003 by the plaintiffs, female store managers
average slightly under $90,000 in annual income, while their male
counterparts average slightly over $100,000. And while women make up 79
percent of the store's department heads (an hourly position), only 15.5
percent are store managers. Judge Jenkins offered a strongly-worded
assessment of the evidence:

"Plaintiffs present largely uncontested descriptive statistics which
show that women working at Wal-Mart stores are paid less than men in
every region, that pay disparities exist in most job categories, that
the salary gap widens over time, that women take longer to enter
management positions, and that the higher one looks in the organization
the lower the percentage of women."

Wal-Mart has argued that most of the decisions about hiring and
promotion are decentralized. The plaintiffs contend, however, that a
company in which headquarters chooses to regulate certain regional
minutiae, such as individual store temperatures, also has the capacity
to keep an eye on gender issues.

But is Wal-Mart really any different from its competitors when it
comes to treating its female employees fairly? An extensive search of
cases against Target doesn't turn up any similar accusations, and while
Costco does face a gender discrimination class action, it involves
hundreds of women, not millions. Brad Seligman, who is lead counsel on
the gender discrimination cases against both Wal-Mart and Costco,
stresses that, even accounting for differences in size, Wal-Mart is
exceptional. "I'm the first to concede that the Costco case is nowhere
in the same league as the Wal-Mart case," says Seligman. "I've done 50
class actions in my time, and Wal-Mart stands out above all of them,
both in terms of the depth and pattern of discrimination and in their
reaction to the charges."

We care, but not that much

Few discount retailers make it easy for workers to unionize.
But it's hard to find one that has been more aggressive, brutal, and
openly hostile to unions than Wal-Mart. Sam Walton faced his first
major union challenge in the 1960s. Two Wal-Marts in Missouri were on
the verge of organizing, and Walton called in a lawyer named John Tate
to stop them. In 1989, Tate, by then an executive vice president of the
company, described the events to Fortune: "I told [Walton], 'You can
approach this one of two ways: hold people down, and pay me or some
other lawyer to make it work. Or devote time and attention to proving
to people that you care.'" Walton soon followed up with a management
seminar called "We Care," began to call employees "associates," and
introduced a widely-praised profit-sharing plan. Whether satisfaction
or fear was at play, no union ever formed.

Since Walton's death, however, the "hold people down and pay me or
some other lawyer to make it work" method appears to have gained favor.
In 2000, when workers in a Jacksonville, Texas, meat-cutting department
successfully voted to unionize, Wal-Mart announced two weeks later that
it would be closing its meat-cutting departments nationwide and
switching to pre-cut meat. Four of the employees who voted in favor of
the union were fired. (The company claims that the timing was
coincidental and that the dismissals were unrelated, but a National
Labor Relations Board judge disagreed. Wal-Mart is appealing the case.)

A year ago, employees at a Wal-Mart tire and lube shop thought they
had enough votes to unionize, but the company fired one of the likely
yes-voters and transferred in six likely no-voters. Again, an
administrative judge ruled that Wal-Mart's conduct had been illegal,
but the goal of blocking the union had been achieved.

And in February 2005, the company announced that it would be closing
a Wal-Mart in Quebec, one of only two unionized Wal-Marts in North
America (the other is also in Quebec). Wal-Mart claimed the store was
losing money, but it refused to release numbers.

Wal-Mart's strong-arm approach is the product of a simple
cost-benefit analysis. As Thomas Cochan, a professor at MIT's Sloan
School of Management, explains, "we have a law that is no longer
serving its basic objective of providing people with the ability to
organize. The incentives are too weak to keep companies from violating
the law if they don't want to comply." The National Labor Relations
Board can order an employer to rehire a terminated employee and to pay
back wages, but it can't impose criminal penalties or punitive damages.
This is rather like telling a bank robber that the penalty for a failed
heist is being required to return the money to the bank. And Wal-Mart
takes full advantage of such laxity. Store managers are equipped with
56-page pamphlets titled "The Manager's Toolbox to Remaining Union
Free," and representatives from the "People Division" in Bentonville
are flown out at a moment's notice if there are any signs of union
activity. According to a 2004 report in The Nation, stores even
administer personality tests to applicants to screen out potential
union sympathizers.

Although Target and Kmart both take pains to head off workers who
might organize a union -- Costco, by contrast, has some unionized
employees -- Wal-Mart still leads the competition. Over the past 10
years, the NLRB or its administrative law judges have determined in at
least 11 cases that Wal-Mart or individual Wal-Mart stores were
engaging in unfair labor practices to prevent unionization, according
to the agency's website. In that same period, both Target's and
Costco's records appear to have remained clean. An excerpt from one of
the decisions against Wal-Mart gives a sense of the extent of the
violations:

The Respondent, Wal-Mart Stores, Inc., its officers, agents, successors, and assigns, shall:



1. Cease and desist from

(a) Promising to remedy employee concerns in an effort to undermine support for the Union.

(b) Removing supervisors from their position in an effort to undermine support for the Union.

(c) Engaging in surveillance of the union activities of employees.

(d) Coercively interrogating employees concerning the union sympathies and support of other employees.

(e) Installing new equipment to remedy employee complaints in order to undermine support for the Union.

(f) Transferring employees into the TLE [Tire Lube and Express division] to dilute the support for the Union.

(g) Transferring employees into the TLE to remedy employee complaints
about inadequate staffing in order to undermine support for the Union.

(h) Transferring employees out of the TLE in order to dilute the support for the Union.

The post-Sam era

"Sam would have been proud" is the highest tribute that can be
paid at the company Walton left behind. Increasingly, though, it's also
clear that what the writer Barbara Ehrenreich termed the "Cult of Sam"
has played a large role in its current woes. Walton, in his day, played
a hard game, but he knew when to hold back. Unions were fiercely
resisted, but employees were treated respectfully. Wages were low, but
people were made to feel they had a stake in the company. Bargaining
with suppliers would be tough, but some holds would be barred. Walton's
instincts, in short, helped to keep the company's foibles in check.
Absent Walton, the redeeming features of Wal-Mart began to disappear.
What remained were the relentlessness, the chauvinism, and, above all,
the cheapness. As so often happens, the leader wasn't doctrinaire; but
the followers are. A Fortune article from 2003 notes how, at Wal-Mart
headquarters, "nothing backs up a point better than a quotation from
Walton scripture."

It won't be easy for Wal-Mart to change its ways. Wake Up Wal-Mart
likes to point out that Wal-Mart could raise its average wages by two
dollars an hour if it raised prices by only a penny on the dollar. But
Wal-Mart is led by people whose lives are devoted to coming up with
ways to shave a penny -- or a half penny, or a quarter penny -- off of
a dollar. Wal-Mart's chief spokesman summed up the difficulty in an
interview with The New York Times. Change might be necessary, he
admitted, but, "at the same time, we can't change who we are -- we
can't change what makes Wal-Mart Wal-Mart."

But they may have to. Union-busting, gender discrimination, and
off-the-clock work aren't innovative; they're illegal. And there are
signs that the company is beginning to recognize the need for change.
In a message to company managers posted on Wal-Mart's internal website
and published by The New York Times in February, CEO Lee Scott wrote:
"If you choose to do the wrong thing... if you choose to take a shortcut
on payroll, if you choose to take a shortcut on a raise for someone,
you hurt this company. And it's not unlikely in today's environment
that your shortcut is going to end up on the front page of the
newspaper." With any luck, Wal-Mart will work through its identity
crisis and produce a company that's a model for the industry. With even
more luck, Americans will begin a thoughtful debate about balancing our
needs as consumers and our needs as producers. Until then, we can focus
on getting Wal-Mart employers to abide by the laws we have. In many
instances, that alone would be a significant improvement.