March 2007
Putting Employees First By Meghan Boyer

Happy employees are good for business, and since most companies need them to operate successfully, it stands to reason that treating employees well should be a top priority for every company. Unfortunately, in an age of cutting costs and slimming operations, many businesses have forgotten this fact (or choose to ignore it), but not Costco Wholesale.

Employees are the single largest cost of operations for Costco, and the company’s philosophy centers on treating them well, which it does in a number of ways, from promoting within the company to providing benefits to both full- and part-time employees. The result is a loyal group of happy workers that help make Costco a successful, profitable company.

Building An Agreement

Each Costco location operates as a near autonomous unit, with each warehouse manager controlling the hiring, firing and people interactions of approximately 250-300 people at his or her store. Corporate handles purchasing and gives the warehouses guidelines for some elements, such as general merchandising and hours of operation.

Broad guidelines for how the company wants to operate and handle employees are written in an employee agreement, explained John Matthews, senior vice president of human resources and risk management with Costco. The agreement is not a policy manual. “It’s simply: This is our intent. This is what we want to try and do. It sets the tone for our relationship with our employees,” he said.

Employees actually build the agreement, which is reworked every three years. At each Costco location, focus groups sit down to discuss changes and make suggestions. The company prides itself on getting 100-percent participation from each warehouse.

This year, more than 3,500 suggestions came in, according to Matthews. He is currently at the end of the agreement reworking process, and a new employee agreement is being issued at Costco this month. Once submitted, the suggestions are grouped and considered. Corporate reports back to employees as to which changes they can make and which they cannot make.

Maintaining Consistency

Costco has kept its business simple and philosophy consistent since its inception in 1983. “A company can say whatever it wants to, but how it acts and how it behaves tends to be the telltale. If your behavior over time has been consistent enough, you can build trust. If you can get enough trust, you can actually get respect between employees and managers and senior leaders in the organization,” said Matthews.

“I think where we benefit from all of that is that we have an ongoing relationship with our employees that is not based on some new thing that we’re going to do this week. It’s part of who we are. It’s part of what we say. It’s part of what we do. And we try to do it every day.”

A byproduct of Costco’s relationship with its employees is a low turnover rate. Matthews estimates the turnover rate for Costco’s U.S. workforce at roughly 20-21 percent. Within that, the turnover rate for employees who have been with the company for one year or more is about 6 percent, which is somewhat unheard of, according to Matthews.

He attributes the low turnover in part to the company’s consistent philosophy and in part to the company’s standard of promoting from within. “Every single one of our warehouse managers started by pushing carts or ringing a cash register or by being out on the floor doing something,” Matthews explained.

Bountiful Benefits

Part of Costco’s hiring plan is to recruit employees while they are still in college and sometimes even high school. The idea is students will elect to stay and pursue a career at Costco after seeing what the company has to offer and it offers a lot.

Currently, new hires start at $10 per hour, and the average hourly pay rate at Costco is about $17. Twice a year, employees receive a bonus check; the amount is tiered by years of service, explained Matthews. Employees with fewer than 10 years of service receive a $2,000 check twice a year. The highest bonus amount is $3,500 twice a year. Costco is working on increasing the starting wages and bonuses; in the future, the starting wage will be $11 per hour, stated Matthews.

Costco offers a full range of health benefits to both full- and part-time employees. In fact, part timers receive essentially the same benefits as full timers, but the contribution rates and deductibles are slightly higher, Matthews explained. The company picks up about 90 percent of the cost. “Of the people who are eligible for benefits, about 92 percent accept them,” he said.

In addition, a broad range of 401k investment options is available for employees. Costco matches at 50 percent the first $1,000 an employee contributes. At the end of the year, Costco places additional money into each employee’s 401k account; the contribution totals are based on years of service and annual earnings.

The additional end-of-year 401k contributions go to all Costco employees whether they are contributing to 401k themselves or not. This means all employees are building their 401k funds in some way. “It’s a really positive thing for our employees,” noted Matthews. “Our goal, obviously, is to get them into a position where they’re going to have something they can fall back on.”

How Do They Do It?

The big question is this: How does Costco find the money to do all it does for its employees? One of the keys is efficiency. The company’s no-frills operations include basic warehouse structures, unadorned store interiors, no media advertising and no credit card payment option in stores.

Another key is budgeting. A lot of times in budgeting, explained Matthews, companies calculate estimated sales and, out of that, what the company is projected to net for the year and what needs to be dropped to the bottom line. After that, companies back into what they have left over and figure out the other budgets, such as for labor, and start cutting if need be. Costco doesn’t operate like that.

“We kind of figure out what we want to pay our people, the benefits we want to give them, and we start there as a cost of doing business and then we build around it. So if we want to get money down to the bottom line, it’s going to have to come in other efficiencies, but not on the backs of our employees,” said Matthews.

Now that you know what Costco does for its employees, ask yourself this: What are you willing to do for your employees?

SIDEBAR

A Costco Wholesale Primer

Costco Wholesale Corp.’s chain of membership warehouses offers brand-name merchandise at lower prices than typically found at conventional wholesale or retail sources, states the company’s Web site. The company uses its buying power to find and purchase items of interest to its members and strives to pass savings along to its members. Three types of membership are available for businesses and individuals, and product categories include groceries, sporting goods, office equipment and supplies, jewelry and more. The company prides itself on having very low margins and very low expense ratios.

According to Jim Sinegal, the company’s president and chief executive officer, on the Costco Web site, “Costco is able to offer lower prices and better values by eliminating virtually all the frills and costs historically associated with conventional wholesalers and retailers, including salespeople, fancy buildings, delivery, billing and accounts receivable. We run a tight operation with extremely low overhead, which enables us to pass on dramatic savings to our members.”

Company Profile

Home office: Issaquah, Wash.
Number of warehouses: 504 (as of Dec. 2, 2006)
Locations: 371 locations in 38 U.S. states and Puerto Rico in addition to international locations in Canada, United Kingdom, Taiwan, Korea, Japan and Mexico.
Membership data: 481_2 million cardholders (as of Nov. 26, 2006)
Average warehouse size: 140,000 sq.ft.
Annual revenue Fiscal Year 2006: $60.2 billion
U.S. workforce: 93,000 full and part time
Global workforce: 132,000 full and part time
Union members: 12,500