Why McDonald's Corp.'s Minimum Wage Hike Doesn't Matter

By Markets Fool.com

McDonald's joined Wal-Mart and a slew of other retailers earlier this month by announcing it would raise the minimum wage for employees at all company-owned stores.

Continue Reading Below

Starting July 1, Mickey D's will lift hourly pay at those stores to $1/hour over the local minimum wage rateand it will raise wages of all employees up to the restaurant manager level accordingly. The fast-food giant also predicted that by the end of 2016, the average wage for hourly workers would be above $10; additionally, workers will now be eligible for paid time off after more than a year of service, at a rate of one week of vacation time for each year worked.

New CEO Steve Easterbrook explained the move, saying,"We know that a motivated workforce leads to better customer service so we believe this initial step not only benefits our employees, it will improve the McDonald's restaurant experience."

Reaction to the wage hike was mixed as many labor advocates said the increase wasn't enough.Kendall Fells, the director of advocacy group Fast Food Forward, called the move a "PR stunt" and said,"We're going to show McDonald's that this movement won't stop until we get what we deserve."

Still, other pundits gave the company credit for taking a step in the right direction and said the decision was part of a meaningful trend.New York Timescolumnist Paul Krugman said the increase could be a "harbinger of important change" and is further evidence that big employers are beginning to recognize that better-paid workers do a better job.

Continue Reading Below

Most importantly, however, the decision only affects a small percentage of McDonald's workers since only about 10% of domestic McDonald's locations are company-owned. The Golden Arches counts about 90,000 workers at domestic restaurants under the corporate umbrella, but nearly 750,000 people work at all McDonald's locations nationwide, including those owned by franchisees.

So, on a larger scale, McDonald's corporate's decision means little to the vast majority of employees, and it likely won't have any effect on performance at about 90% of domestic restaurants, since at those stores, wages won't change. Franchisees determine their own pay policies and customers are unaware of which restaurants are company owned and which are franchisee owned. The only way, then, that the wage hike would make a meaningful impact for the company is if the franchisees also went along with it.

Will the franchisees get on board?
Times have been tough for McDonald's franchisees lately, as store traffic and same-store sales have fallen. Meanwhile, many operators have chafed at costly requirements such as additional equipment purchases and menu expansions.

CEO Easterbrook was also eager to defer any decision on pay increases to the franchisees, calling them "experts ... at setting the right pay levels in their local markets," and said McDonald's would not require them to raise wages in any future contracts.

Of course, the decision by McDonald's corporate to raise wages may exert pressure on franchisees to follow suit, but many may be unable to do so given the brand's poor performance lately. Thus far, franchisees have been mum on any potential wage increase. A spokeswoman for the International Franchise Association refused to discuss details about McDonald's franchisees and said only,"Market forces will dictate higher wages as businesses seek to recruit the best available talent for available jobs."

Implicit in the decisions by retailers such as Wal-Mart andTargetto raise wages beyond the required minimum is that market forces are already driving wages higher. Employees at McDonald's franchises will soon have many options should they choose to jump ship for higher pay. In July, McDonald's company-owned stores will join that list. That means that franchisees in the same market as McDonald's corporate may have to raise wages to keep workers from fleeing to company-owned stores.

Still, what's most likely to boost wages at all McDonald's stores would be improved performance. Easterbrook is clearly focused on that as well with announcements that the company would cut the use of antibiotics in chicken and test serving breakfast all day, two decisions that could easily boost sales. Hiking wages may be a smart PR move for Easterbrook, but ultimately the bottom line will deem if franchisees will follow suit. Without the franchisees' support, the decision carries little weight.

The article Why McDonald's Corp.'s Minimum Wage Hike Doesn't Matter originally appeared on Fool.com.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.