McDonald’s Raises to Cost Nearly $200 Million

The company will also allow full-time and part-time employees with at least one year of service to accrue personal paid time-off beginning July 1.

How much is this going to cost McDonald’s and ultimately its shareholders? If we assume that all 90,000 employees at corporate-operated stores are now earning the federal minimum wage of $7.25 an hour and that the average wage will reach $10.25 by the end of next year (just to keep it simple), that $3 an hour translates into an annual total of more than $560 million at the end of 2016. Each $1 increase per hour costs Mickey D’s about $187 million.

McDonald’s currently pays an annual dividend of $3.40 on about 961 million shares outstanding, or a total of about $3.27 billion. Every dollar increase that McDonald’s pays to its 90,000 workers is equal to about $0.20 per share.

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In 2014 the company posted $4.76 billion in net income. A dollar an hour pay increase for 90,000 employees amounts to about 3.9% of total net income. McDonald’s annual net income fell by $828 million (about $0.86 a share) between 2013 and 2014.

The pay hike does not apply to workers in the roughly 13,000 U.S. stores that are operated by franchisees, representing 90% of McDonald’s locations around the country. In its press release on Wednesday the company said:

These two benefit enhancements apply to McDonald’s company-owned restaurants, which represent more than 90,000 employees and about 10 percent of McDonald’s restaurants nationwide. The more than 3,100 McDonald’s franchisees operate their individual businesses and make their own decisions on pay and benefits for their employees. … In addition, McDonald’s USA is increasing efforts to help the approximately 750,000 employees who work in a McDonald’s restaurant — company- and independently-owned — achieve a higher level of education by expanding its Archways to Education offerings to include free high school completion and college tuition assistance.

McDonald’s is fighting a ruling by the National Labor Relations Board (NLRB) that the company is essentially a joint employer with its franchisees. The ruling was issued in December, and the NLRB hearings in Chicago commenced this week. Ironically, perhaps, McDonald’s attempts to beat back efforts from unions to organize fast-food workers have strengthened the case that the company is a joint employer with its franchisors.

If the NLRB ruling withstands the company’s challenges, another 675,000 employees (90% of the 750,000 cited in Wednesday’s press release) may soon be looking at getting a similar pay raise. Each dollar an hour increase adds up to an annual cost of about $1.4 billion. Even if McDonald’s only paid half that and franchisees paid the other half, that would be a serious blow to McDonald’s bottom line.

The stock is trading down about 0.8% Thursday morning, at $95.53 in a 52-week range of $87.62 to $103.78. Shares dropped about 1.2% on Wednesday.

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