SEIU-supported protesters were bused to McDonald’s annual shareholders’ meeting in Oak Brook, Illinois today to agitate in favor of higher pay and greater benefits. Their demands were twofold and familiar: an increase in the minimum wage to $15 an hour and a union. Many market watchers see the rise in McDonald’s Q1 sales as a sign that the company is coming out of its several-year-long slump, and the potential for profit has spurred activist calls for McDonald’s to spread the wealth around.
The notion that McDonald’s profit is easily translatable into a substantial increase in its starting wages is best captured by one of the Fight for Fifteen’s architects, David Rolf. In a 2016 book that shares the name of the campaign he helped launch, the Seattle SEIU Local 775 president mentions McDonald’s by name as an example of a company that can afford to pay more. Specifically, Rolf states that McDonald’s made a profit of over $18,200 per employee per year in 2013. Surely, the company could afford to give its employees a raise, right?
Unfortunately, Rolf overestimated McDonald’s per employee profit by almost a factor of three.
To get to the incorrect value cited in his book, Rolf began by using McDonald’s operating income instead of using the company’s actual profit after taxes and other expenses are paid. This caused the first distortion, as McDonald’s annual report places operating income at about $3 billion more than its net profit.
Rolf then made his error worse by focusing solely on the labor costs of McDonald’s 440,000 corporate employees. Using this method, Rolf claimed that only 17% of McDonald’s revenue went to labor costs. However, close to 90% of McDonald’s locations are run by franchisees, and the average franchisee pays 26% of its revenue to cover labor costs, an omission that earned another pro-wage hike analysis a Huffington Post retraction.
The actual profit per employee at McDonald’s with 23 employees is roughly $6,700. A pay boost to $15 for a part-time employee currently earning the federal minimum wage would wipe out that entire profit and then some.
The protests at McDonald’s annual shareholder meeting are fueled more by perception than reality. The perception is that, with renewed profitability, McDonald’s can afford to raise their minimum wage to $15 an hour. The reality, as expressed by retired McDonald’s CEO Ed Rensi on Tuesday, is that there is a point when it becomes cheaper to automate some jobs than to increase wages. If activists succeed in their fight for $15, entry-level employees will become even less affordable.