Costco's Socially Responsible Employment Policies

Layoffs and other forms of cost cutting relative to employee benefits have, as a rule, generally had a positive effect on a given company's stock price.  Wall Street analysts equate cost-cutting with a move towards efficiency regardless of whether a layoff or low wage strategy is intrinsically good for the company or not. It is simply considered common wisdom that keeping workers pay and benefits low is an effective business strategy.

CEO James Sinegal of Costco disagrees, believing that Wall Street's short term mentality says nothing about building long term organizational capacity.  Sinegal believes that paying workers well is just good business. Conversely, CEO Mike Duke of Walmart which operates Sam's Club, a competing warehouse store, has a dramatically distinct orientation. In the CNBC documentary The New Age of Walmart, Duke was asked about the low pay of workers relative to reported high earnings of 13.4 billion dollars. He responded that it was "a very delicate balance." Walmart policies are notoriously stingy with employee benefits such as health insurance and they fight tooth and nail to keep employees from organizing unions.

How is it that Costco thrives with such a dramatically different philosophy?  The membership model was adapted by Costco after they merged with Price Club in 1993. They maintained Price Club's low cost high volume strategy, however, Sinegal is very conscientious about balancing the needs of employees, customers, and shareholders. Instead of squeezing employees and customers by paying as little wages as possible while charging the highest margins possible, Sinegal seeks out other methods to keep costs low.  For example, they have lower mark-ups on products but limit brand and product variety allowing for better bulk rates from suppliers.  They also do not pay for advertising and target the needs of small-business owners and more upscale customers.  Sinegal says he likes the "treasure hunt" model such that they might have some higher end merchandise hiding amongst other common products, such as Waterford Crystal for example.

Costco offers employees health insurance including dental even for part-time employees who have been with the company only six months, as opposed to two years or more for Walmart employees. The average pay for a Costco worker is $17 an hour, around 42 percent more than at Sam's Club.  Sinegal feels that cutting costs by underpaying average floor workers while the CEO is making from 100 to 300 times more is deplorable. Even with Costco's successful earnings record, Mr. Sinegal's salary is kept at $350,000 - less than 10 percent of what other CEO's make. He earns significantly less than his peers. Sinegal does receive a bonus - last years was $200,000 - and considers himself well rewarded from his stock holdings. Meanwhile, Mike Duke's compensation package for the last fiscal year was around 19.2 million, almost 967 times the average Walmart worker.

Costco, Starbucks and Whole Foods introduced a "third way" into the pending Employee Free Choice Act. Rather than requiring an election, with "card check" a union could be formed when a majority of workers sign onto authorization cards.  Walmart, on the other hand, obstructs their workers form organizing unions at every turn.

Walmart may be getting some religion relative to environmental concerns with their initiatives for less negatively impactful product packaging and further efforts to "green" their supply chain. Still, they are way behind in good labor and other social policies.  Costco CEO Jim Senegal has proven that a people centered business model can succeed.

Photo Credit: by scaredy kat