Walmart’s too-good-to-be-true “$1 a day” college tuition plan, explained

Walmart is the largest private employer in the United States, so its human resources policies are always big news with national implications.

If headlines this week like “Walmart’s perk for workers: Go to college for $1 a day” (CNN) or “Walmart to offer employees a college education for $1 a day” (Washington Post) sound too good to be true, that’s because they largely are. The benefit is real, but it is much more restrictive than those headlines suggest. It’s essentially a bulk purchasing discount for a narrow range of online college courses.

It’s also a telling benefit on a number of levels. The labor market is getting stronger, and employers are needing to think harder about how to invest in recruiting and retaining employees. But the old-fashioned strategy of paying more continues to be something corporate America resists, in part out of habit and in part because offering higher wages is a little more complicated than it looks. Companies like Walmart are, in essence, trying to get creative with their compensation packages in hopes of narrowly targeting the money they expend on the core goal of recruiting and retaining desirable workers.

The question is whether policymakers will keep unemployment low long enough to break through the wall of resistance to across-the-board pay hikes and force big companies to finally just raise pay.

The Walmart program is limited to online degree programs offered by three schools — the University of Florida, Brandman University, and Bellevue University — and specifically focused on bachelor’s or associate degrees in either business or supply chain management.

You won’t, in other words, be able to do part-time shifts at Walmart to “pay your way through college” in the traditional sense.

But qualifying Walmart employees (including both full-time and part-time workers who’ve been with the company for 90 days) will get discounted tuition, books, and access to a coach who will help them decide on an appropriate program and shepherd them through the application process.

It’s a nice opportunity for Walmart employees to gain a chance at upward mobility off the retail floor, and that’s likely the point. Unlike higher cash wages (which of course can be used for online college tuition as well as rent, gasoline, movie tickets, medical expenses, etc.), the tuition benefit is likely to be disproportionately appealing to people who are on the more ambitious end of the distribution. It’s an effort, in other words, to make Walmart more attractive specifically to the most appealing set of potential workers, a strategy other companies have pursued in recent years.

Modest tuition programs have long been a staple of large employer benefits packages largely because of favorable tax treatment. The IRS allows employers to give employees several thousand dollars’ worth of tuition benefits tax-free, which makes establishing a program something of a no-brainer for most companies big enough to be employing a large back-office staff anyway.

But four years ago, Starbucks blazed the trail of offering a much more ambitious reimbursement program that essentially offered taxable tuition subsidies rather than taxable wage increases.

The reason: Academic research shows that workers who are interested in tuition subsidies are different from workers who are not. While everyone likes money, Peter Cappelli’s 2002 research indicates that the workers who like tuition subsidies are more productive than those who don’t, and Colleen Manchester’s 2012 research shows that subsidy-using employees have longer time horizons and are less likely to switch jobs.

In March of this year, a consortium of big US hotels launched a generous tuition discount program, and later that month, McDonald’s substantially enhanced its tuition benefits. Kroger — another top five US employer — rolled out a new tuition program in April, and Chick-fil-A expanded its program in May.

These initiatives differ in detail, but the broad story is the same. The unemployment rate is now low, so recruiting new staff is getting harder. Companies are looking to enhance their compensation but would like to do so in targeted ways.

The basic problem facing large employers in a low-unemployment recruiting environment is that raising pay can be very costly.

It might be profitable to add one (or 100) additional workers at your currently prevailing wage rates, but impossible to find any actually qualified people who want the job at that pay level. Offering more money would be a natural solution, but you can’t really offer more money to 100 new employees without doing something for your hundreds of thousands of existing employees, and raising pay across the board to recruit new staff could make your company less profitable rather than more profitable.

Indeed, some CEOs recently told a forum organized by the Federal Reserve Bank of Dallas that they would never offer broad-based pay raises again.

The truth, however, is that this is less up to the discretion of CEOs than they would like. Six years ago, after all, companies weren’t increasing the generosity of their tuition programs. They didn’t change their minds about this because they suddenly became nice people; they changed their minds because the labor market got tighter. Going forward, the Fed might raise interest rates fast enough to prevent wage pressures from ever really building, or a new financial crisis might derail the economy.

But if not, companies will find that the longer the jobless rate stays low, the harder they have to dig for help. For some, that will mean accepting smaller profit margins, while for others it will mean higher prices. And for those companies that can’t raise prices, it may mean actually running the risk of being driven out of business as companies with more pricing power poach their staff. For now, though, most big employers are only dabbling in generosity, with tuition discounts serving as an easy step into the shallow end of the pool.