The Economics of Undercover Boss

Supervisor working in warehouse
Morsa Images / Getty Images

As even casual viewers of the CBS "reality show" Undercover Boss will notice, the cash awards given to a handful of struggling employees by undercover executives have been escalating. Nonetheless, a hard look at the numbers will reveal that these feel-good moments cost the featured companies only a small fraction of the expenses that they would incur if they endeavored to institute sweeping changes, mainly in compensation and benefits, that helped all employees.

Certainly, any CFOcontroller or human resources professional should be able to point this out readily. On the other hand, from a human resources perspective, such singling out of a few employees for lavish financial assistance, when many others continue to struggle under similar circumstances, is bound to create resentments. Also, see our discussion of 5 lessons from Undercover Boss.

The Modell's Case

When the Modell's Sporting Goods retail chain was featured on a November 2012 episode of Undercover Boss, CEO Mitch Modell was especially moved by the hardships faced by a model employee in Washington, DC. She, her husband and her 2 daughters had lived in a homeless shelter for 2 years. She also was expecting another child. Mitch Modell responded by offering them a check for $250,000 to buy a house, plus some extra help in furnishing it. This was generous, to be sure, but how did this help other employees who undoubtedly were in similar, if not quite as extreme, straits due to low pay at Modell's stores?

An article on ​aol.com ("'Undercover Boss': What Really Happened to 'Epic Employees'" by Dan Fastenberg, May 13, 2013) points out that the average employee salary at Modell's is a mere $24,248. Citing data from Glassdoor.com, the author notes that this is in line with the national average for retail salespeople (the most common occupation in the U.S.), but $20,000 below the overall average wage nationally.

As the author notes, "it does raise questions about Modell's salary structure if a full-time employee is forced to live in a homeless shelter."

With about 3,800 employees and 150 stores in the northeast ("'Undercover Boss' brings changes at Modell's" by Terry Lefton, SportsBusiness Journal, October 29, 2012), raising every employee's wage by a mere $1 an hour (about $2,000 or so per year, exclusive of overtime) would add up to $250,000 after only a week or so. As a point of comparison, Modell's has annual revenues of around $680 million.

Among the changes promised by Mitch Modell, as a result of his experiences while filming the show, are improved processes for identifying and promoting top employees, as well as various initiatives to reduce workloads and stress. But the latter would entail additional hiring, with its concomitant expenses. Whether this has happened is unclear.

Ratings of the company by current and former employees are positive on Indeed.com (an average of 3.5 out of 5) and neutral on Glassdoor.com (an average of 2.7 out of 5). Low pay is a common complaint, but several respondents note that it is roughly in line with other retail businesses. However, according to the site Payscale.com, Modell's typically pays about 16% below market.

According to The New York Times ("Some Retail Workers Find Better Deals With Unions," September 7, 2014), Modell's stores in Manhattan are unionized. A benefit brought by the union is more stability in scheduling than at nonunion stores. That is, employees know several weeks in advance when (and how long) they are scheduled to work, and their pay is guaranteed. They also are guaranteed a certain minimum number of hours per week. At nonunion stores, employees can be sent home without pay if too few customers are showing up. They also can be constantly on call, forced to show up for work with little or no notice.

The Forman Mills Case

A new high in gifts to employees was reached in a January 2015 episode featuring clothing retailer Forman Mills, which focuses on selling low ticket items in low-income neighborhoods.

Its stores resemble large indoor flea markets. Indeed, as a teen, founder and CEO Rick Forman learned retailing by selling in traditional outdoor flea markets. Forman handed out over $600,000 in cash awards to 4 lucky employees whom he encountered during his time undercover. In the fashion of Mitch Modell, his gifts also included a $250,000 grant to help a formerly homeless employee, who also was a recovering alcoholic, in buying a more suitable house.

Once again, the financial plight of these employees encountered by the boss on camera presumably was hardly unique. Because of the low wages paid and inadequate (if any) health benefits offered by their employer, these workers struggled with making ends meet and often had outsize debts relative to their income, including debts related to medical bills. Reviews of Forman Mills by current and former employees on Glassdoor.com are uniformly, and scathingly, negative.

While $600,000 is indeed a considerable sum, it nonetheless is a relatively cheap public relations gesture on national television. It also is a one-time expense. Forman Mills has 35 stores, 2,900 employees and annual revenues of $275 million ("'Undercover' opens Forman Mills boss' eyes," The Philadelphia Inquirer, philly.com, January 21, 2015). Raising every employee's wage by a mere $1 per hour would cost Forman Mills a recurring amount of at least $600,000 every month. Buying individual health insurance for its workers might cost nearly $1.5 million per month. Giving them family coverage would be at least twice as expensive. In these contexts, Forman's promise to spend between $3 million and $4 million on a new cash register system to enhance employee productivity and improve the customer experience is not as significant as it might sound to the average viewer.

Comparison to TV Ad Costs

Another way of benchmarking the cost of these gifts to select employees is by comparison to TV advertising costs. For a 30 second ad during Undercover Boss in its usual Friday 8:00 PM (Eastern and Pacific) time slot, CBS charges about $56,000 ("The Economics of Prime Time: How Much Does It Cost To Place A 30 Second Ad In A Prime Time Weeknight TV Show?" by Lisa Mahapatra, International Business Times, October 14, 2013). This is at the low end of the range for weeknight shows in the same time slot: The Big Bang Theory, also on CBS, gets around $326,000.

In the sense, the positive public relations vibe that CEOs hope to create for their companies through these gifts to employees also costs relatively little compared to image advertising on TV, and is bound to be far more effective. Rick Forman's $600,000 in gifts would buy 5 minutes of ad time on Undercover Boss or a bit less than 2 minutes on The Big Bang Theory. Meanwhile, one can argue that Undercover Boss itself serves essentially as free advertising for the companies involved, albeit with the caveat that the show inevitably shows problems in product quality, customer service and/or the treatment of employees.