case 11-2 employee red-lining at cvs: the have and the have not

Add your opinion about the choices and decisions being made—if this was your company would you make this choice? 

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What would you do differently?   

CVS Caremark is the second-largest drugstore chain in the United States (just behind Walmart). It employs 286,000 people in 45 states under the CVS logo, and it operates more than 7,600 drugstores. In 2013, CVS’s sales exceeded $126 billion, but its net income was only around $4.6 billion, for about a 3.6% profit—about the median profit for the industry.(1)

As would any other public corporation, CVS wanted to increase its profitability for stockholders and regain its position as the industry leader. One method of increasing profits is cutting operational costs, and CVS decided to do just that. It adjusted employee annual pay raises by placing an earnings ceiling on salaries, and any employees earning the highest hourly wage in their job classification became ineligible for a raise.

Besides the obvious cost savings, why put a “red line” on wages? The main goal was to adjust the highest-paid employees’ compensation to the job market average and, with these savings, provide raises to the employees who were paid below that average. The philosophy was that as a CVS employee, one should expect lower raises (or none at all) if one is earning much more than one’s colleagues. So once an employee reached the red line, that person received no additional compensation.

CVS executives knew that the new compensation policy would negatively impact some of their most loyal employees, yet the executives felt that they needed to draw a line on salaries in order to make the most of limited compensation dollars. What they did not figure was that the policy mostly hurt the employees who had been working there the longest. Worse, these same employees feared retaliation if they publicly criticized the new policy. How would it look to the other lower-paid employees (and worse, the public at large) if the highest-paid employees complained about their lack of raises?

Nationwide, the minimum wage is set at $7.25 per hour, but the wage management guidelines of CVS are different in most regions depending on the minimum wage in each state. Lowest-ranked employees with exceptional skills would receive a 4.75% raise on an annual basis if they were making minimum wage. However, if an employee with exceptional skills in the same position was already earning $12.50 an hour, that person would not receive a raise, having already crossed the red line.(2) With employment-at-will, the possibility of being laid off, and a tough job market, where would these employees get such high-paying jobs in the retail and service industries? It was better for them to keep quiet about their pay and stay in a company that they were comfortable with(3)

Wage rates depend on employees’ rank, and it is no secret that the CEO is going to be paid much more than the company’s average worker. This is because the CEO job requires a more demanding set of skills compared to the average store job, and the workload of a CEO is much more demanding. But if the range of compensation is so great, it may discourage employees who are paid less.

Some ethical and legal concerns arose when these same red-lined employees found out that this new compensation policy did not seem to apply to the top-level executives. The CEO of CVS was paid a total of $23 million in 2013, including bonuses and additional perks. He earned a 26% raise from the previous year, and that was almost 800 times more than the median income of a CVS employee. The red-lined employees saw an inequitable pay situation, with the rich getting richer because they were allowed a raise while the in-store employees had a cap on their income. The CEO’s salary package was tied to the company’s performance, and according to CVS spokesperson Carolyn Castel, “Last year, CVS Caremark had an outstanding year and continued to deliver strong financial results and enhanced returns to shareholders in a challenging economic environment, performing favorably against our peer group in several key areas.”(5)

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