The Economics of "Undercover Boss"

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Reality TV show "Undercover Boss" awards cash prizes to a handful of struggling employees by way of undercover executives. A hard look at the numbers reveals that these feel-good moments cost the featured companies only a small fraction of the expenses they would incur if they endeavored to institute sweeping changes, mainly in compensation and benefits, that helped all employees. In other words, the generosity of the executives depicted on the show might not be so impressive.

Certainly, any CFOcontroller, or human resources professional should be able to point this out. 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.

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, D.C. She, her husband, and her 2 daughters had lived in a homeless shelter for two years. She also was expecting another child. 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?

The average employee salary at Modell's was a mere $24,248 shortly after the airing of that episode, according to Glassdoor.com. That figure was in line with the national average for retail salespeople but about $20,000 below the overall average wage nationally at the time.

SportsBusiness Journal reported in 2012 that Modell's had annual revenues of about $680 million with about 3,800 employees and 150 stores in the northeast. Raising every employee's wage by $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.

Among the changes promised by Modell as a result of his experiences while filming the show were 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 accompanying expenses.

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. He handed out more than $600,000 in cash awards to four lucky employees he encountered during his time undercover. In the fashion of 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 employees encountered by the boss on camera presumably was typical. Because of the low wages paid and limited 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.

While $600,000 is a considerable sum, it 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, according to a Philadelphia Inquirer article around the time of the episode's airing. Raising every employee's wage by $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," CBS was charging about $56,000, as of 2013. This is at the low end of the range for more highly rated shows. "The Big Bang Theory," also on CBS, was getting around $326,000 at that time.

The positive public relations vibe CEOs hope to create for their companies through these gifts to employees cost relatively little compared to image advertising on TV, and is bound to be far more effective. Forman's $600,000 in gifts would buy five minutes of ad time on "Undercover Boss" or a bit less than two minutes on "The Big Bang Theory."