Compensation at Costco

COMPENSATION PRACTICE AT COSTCO 8

Compensationat Costco

Traditionally,a corporate strategy was based on the premise that profits aremaximized when employee benefits and wages are minimized (Sirota andKlein, 2014). Nevertheless, Costco Wholesale Corporation (Costco),has verified that the notion is erroneous. As opposed to othercompetitors, the company provides the highest employee benefits andwages, yet manages to remain profitable (Hill etal.,2014). While the firm’s expenses on labor are higher than average,the compensation practice at Costco has ensured maximum profitabilityfor the sake of all stakeholders. This paper discusses thecompensation strategy at Costco, indicating the accomplishments andchallenges arising from the approach.

TheCompany and Its Compensation Strategy

CostcoCorporation is apublicly traded, self-service warehouse that runs internationalmembership warehouse chains, operating in the United States andseveral other countries (Daft and Marcic, 2015). The company is wellknown for its emphasis on maximizing workforce loyalty, as anapproach that aims at remaining ahead of the competition, mainlythrough the provision of the most attractive employee benefits andwages than any other retailer worldwide (Hill etal.,2014). Costco’s business model insists on the proper treatment ofall employees hence the organization is managed on the principle ofattraction and retention of a highly incentivized and skilledworkforce at all times (Daft and Marcic, 2015).

Employeesat Costco are compensated commendably through incentives thatmotivate the workforce to work hard and remain in their jobs.According to Hill etal.(2014), a starting employee gets a minimum of $10 per hour and getsregular pay rises. A full-time employee can acquire $4000 per yearbonuses, after three and a half years of service to the company.Every employee is made aware of the compensation formula to staymotivated. A cashier is for example given between $10.50 and $17.50per hour. Additionally, 92% of each employee’s premium for healthinsurance is paid by the company, which is far higher than a majorityof large firms. Sirota and Klein (2014) add that employees can havepaid holidays, paid vacation and even sick-offs irrespective ofwhether in part-time or full-time service. Individual performance andwork-hours influence an increase in remuneration. Bonuses are giventwice every year for those who attain the top performance, and anovertime of a minimum of $7.25 per hour.

Costcois keen on ensuring best practice when it comes to employee pay andbenefits. The firm notably pursues a well-developed, high retentionstrategy, with wages starting at 40% more than the country’sminimum wage. The objective here is to raise their commitment,loyalty, and productivity levels. There is an emphasis on theinternal development of leadership, fast-paced jobs and interiorsourcing of employees. The company develops leadership from within asa way of motivating the employees. Costco does not recruit newgraduates but improves the skills of the workers by providingsponsorship through graduate school (Heskett et al. (2015). Sirotaand Klein (2014) add that Costco has also adopted a performance paysystem which seeks to achieve the maximum positive effect of theavailable salary and benefits structure. Performance is considered adependent variable which relies on the reimbursement provided.

Thecompensation strategy has however faced various challenges. The mainissue is extreme pressure on the wage budget, attributed to thecompany’s reliance on membership as a source of revenue. Accordingto Heskett etal.(2015), Cataco’s business model aims at keeping low prices, whilethe lost potential for revenue generation is recovered through thesale of membership and in-house product brands. Such reliance isdependent on the members renewing their memberships repeatedly andmaking similar quantity purchases. The initiative, however, can neverbe guaranteed due to unreliability. The price sensitivity of itscustomers is also a considerable challenge in ensuring individualoutput to justify the employees’ good pay. Hill etal.(2014) explain that while high-end department stores can, forinstance, pay satisfactorily due to the maintenance of big markups,Costco’s customers are not likely to pay more. The company,therefore, has to struggle to maintain its net income per employee.

Howthe Compensation Practice Impacts on Stakeholders

Costco’scompensation practice aims at improvement of profitability, and thishelps to serve the interest of shareholders as a stakeholder group.According to Holmes (2011), a skilled workforce that operates withthe appropriate incentives is capable of producing better returns forinvestors through improved customer satisfaction and productivity. Inthis regard, Hill et al. (2014) explain that Costco has through theyears sought to attract the most talented employees possible whileensuring that they remain incentivized as they work. The approachguarantees the most attractive compensation structure. In addition,the initiative has resulted to positive trends in customer serviceand productivity, higher sales per employee rates, leading to betterreturns for Costco shareholders. Investors have drawn greaterdividends than those in Wal-Mart, the biggest retailer in the world.Over the last ten years, Costco has maintained the best Stock MarketReturns.

Employeesand management as stakeholders also benefit from the compensationpractice. The company tries as much as possible to ensure that eachemployee’s economic, psychological and physiological needs arefulfilled. The provision of safe working environments and payment ofcompetitive wages for all is always the starting point for ensuringthat the needs are attained (Holmes, 2011). The excellent treatmentof employees results in higher motivation and job satisfaction. Themanagement also benefits from an improved employee engagement andstability due to lower turnover, therefore a stronger pursuit oforganizational goals and profitability.

Employeeengagement also facilitates enhanced consumer engagement hencecustomer satisfaction (Daft and Marcic, 2015). Even thoughemployee-related expenses and costs are high, employee turnover atthe company is minimal. The rate of employees resigning is 17% ascompared to the industry average of 44%. The implication is that theloyalty created by the firm results to a positive effect (Holmes,2011). For instance, during the economic crisis in 2009, when otherretail companies reduced wages and workforces, Costco gave pay raisesas a way of increasing the morale and happiness of employees hencethe performance of the company did not suffer (Daft and Marcic,2015).

TheImpact of Market Factors, Labor Unions and Laws

Marketfactors have not affected the manner in which Costco conducts itsremuneration practice, mainly because the company has distinguisheditself as unique. Pressure from trade unions, however, impacts onCostco’s compensation efforts. Heskett etal.(2015) explain that while Costco has not embraced unions, it hasnever discouraged its employees from participation. About 15% areunionized already, as part of the International Brotherhood ofTeamsters. The association has been instrumental in the negotiationof employees’ contracts, and the agreed terms are provided even tonon-unionized staff. An example of union involvement is a complaintrelating to retirement benefits where the union is demanding DefinedBenefit Plans (DBPs) in place of the 401(k) plans offered toemployees. According to Daft and Marcic (2015), withdrawal ofmembership from DBPs took place due to the risky nature of thestrategy. The danger was that in case outcomes from investments arepoor, or the retirees outlive the planned ages the company is likelyto suffer from massive additional contributions.

Thecompensation practice at Costco is exposed to external legal forceswhich have always regulated how it operates. In implementing all themeasures, the company adheres to all aspects relating to employeewelfare, minimum wage regulations, and health and safety regulationsat the workplace. Miller and Cross (2015) explain that the companyfully complies with the legal system, just like other organizations.Issues arising from the business or the union are referred to theNational Labor Relations Board (NLRB) and the federal governmentagency charged with the investigation of unfair employee-relatedpractices. In a recent example, Costco’s Social Media Policyprohibits employees from making statements which could harm others orthe company’s reputation online. However, the NLRB declared in a2012 ruling that the policy was a violation of labor laws whichclearly guaranteed all employees the right to associate with anddiscuss any issues relating to their workplaces without interferencefrom their employer.

TheEffectiveness of Traditional Bases for Pay

Itcan be stated that the traditional basis of remuneration is notuseful at Costco. The company provides the employees with the mostcompetitive benefits and salaries. The customary approach of paywhere seniority and merit are valued, against the person focused andincentive- based approach, cannot be successful at Costco. As notedearlier, Castco’s business model is based on renewed customermembership which implies that the clients keep coming back to thestores to get the right buying experience (Daft and Marcic, 2015). The role of performance in maintaining customer experience istherefore, a major factor in sustaining the business and alsoinfluencing workforce compensation. The person focused and incentive-based approach, is the best approach.

Additionally, to remain competitive in the market, the performance ofthe workforces is a critical factor. It is imperative for the companyto adopt a pay system that can support its position in the market.The person-focused approach is, therefore, more appropriate for thebusiness.

Conclusion

Costco’ssuccess as a listed company is attributed to its effectivecompensation practice. Through its competitive wages and benefits,the firm has built a contented workforce. The resultant effect isreduced turnover, higher loyalty, and greater productivity. Thecompany has experienced challenges relating to the sustainability ofrevenues used in the compensation packages, but the issue wasresolved. The reward approach adopted by Costco has resulted inbetter returns for the investors, increased satisfaction foremployees, and increased stability and productivity for managementand the company. The available trade union has contributed toemployee contract negotiations, while adherence to legal guidelineshas ensured the ethical implementation of compensation-relatedmeasures. As an innovative company, Costco has proven that whenemployee compensation is decent, all stakeholders end up satisfied.

References

Daft,R and Marcic, D. (2015).Understanding Management. Stamford:Cengage Learning

Heskett,J, Sasser, E and Schlesinger, L. (2015). What Great ServiceLeaders Know and Do: Creating Breakthroughs in Service Firms.Oakland: Berrett-Koehler Publishers

Hill,C, Jones, G and Schilling, M. (2014). Strategic Management: Theory&amp Cases: An Integrated Approach. New York: Cengage Learning

Holmes,A. (2011). Commoditizationand the Strategic Response. Aldershot:Gower

Miller,R and Cross, F. (2015). The Legal Environment Today. Westport:Greenwood Publishing

Sirota,D and Klein, D. (2014). The Enthusiastic Employee: How CompaniesProfit by Giving Workers What they Want. Upper Saddle River:Prentice Hall