Analysts to Costco: Stop treating your employees so well
You’d think that if a company treats its employees well (a lot better than their competitors) and gets great business results because of it, that this company and it executives would be celebrated and praised for it.
You’d be wrong.
The New York Times has a great article about Costco, the huge American chain of supermarkets who spend much more on their employees than their main competitors:
Costco’s average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam’s Club. And Costco’s health plan makes those at many other retailers look Scroogish.
According to Costco’s CEO Jim Sinegal, this makes good business sense:
Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco’s customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers’ expense. “This is not altruistic,” he said. “This is good business.”
The results are pretty impressive:
Costco’s stock price has risen more than 10 percent in the last 12 months, while Wal-Mart’s has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.
So how do stock analysts react to this? They tell Costco to start treating their employees worse:
Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco’s workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.
“He has been too benevolent,” she said. “He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.”
This makes zero sense to me – but it illustrates two things perfectly:
- Traditional business thinking in some areas still regards employees as resources, that like any other corporate item must be bought as cheaply as possible.
- Executives who believe in treating employees well are faced with pressure from analysts and the stock market to stop doing so and start being more like anyone else – regardless of the results their strategy has been getting them so far.
This is partly why Jim Goodnight, the CEO and owner of software company SAS Institute refuses to take his company public; he knows that it would become much more difficult to keep SAS employees as happy as they currently are (read about how SAS keep their employees happy).
One company did manage to go public and keep their identity: Google. When they announced their IPO, founders Brinn and Page made it very clear that they would continue to run the company their way. They promised to go on treating their employees extremely well and making long-term decisions rather than living from quarter to quarter. If investors didn’t care for that, they were kindly requested to take their money elsewhere. Google being Google, investors flocked to buy the stock anyway – less famous companies might not get away with this approach.
To me, it makes perfect sense that treating employees well makes them happy and that happy companies make more money – and this is backed up by many studies. To give one example, the 100 best companies to work for in the US, have outperformed the general stock market by a factor of 3.
It’s time that investors and stock analysts realized this and started demanding of companies, that they make their employees happy. This not only increases profits, it’s one of the best and most efficient ways to do so.
UPDATE: Turns out the highly up-to-date article from the NY times I reference is 2 years old. So much for my amazing powers of observation :o) Fortunately the tendency still holds and Costco still treat their people better AND outperform Walmart on the stock market.
Charlie Said,
July 17, 2007 @ 10:33 am
I think the analysts are siding with someone that they advised Costco to start treating their employees worse. It’s clear in the results that Costco has an increase in stock price because they treat their employees well.
Stirrdup Trackback Said,
July 17, 2007 @ 3:32 pm
Analysts to Costco: Stop treating your employees so well…
This story has been submitted to Stirrdup. Your support can help it become hot….
alec Said,
July 17, 2007 @ 5:17 pm
Capitalism is for slaves.
Terrence Seamon Said,
July 17, 2007 @ 5:38 pm
Great entry, Alex. Especially the way you wrap it up: “…demanding of companies, that they make their employees happy. This not only increases profits, it’s one of the best and most efficient ways to do so.”
Sounds like the start of another manifesto to me.
Terry
Blog Juice on my Grundel | Prose Before Hos Said,
July 17, 2007 @ 5:50 pm
[...] Costco treats its employees well and succeeds big-time as a result. Wall St. analysts–”S… [...]
Tobey Said,
July 17, 2007 @ 5:59 pm
PLEASE come to the Gulf Coast in Mississippi. I love ya’.
kareem Said,
July 17, 2007 @ 6:35 pm
great post, buddy. wall st. tends to look at everybody but themselves as resources.
i first heard about costco in the late 90s when a friend went to work there, and they were one of the first models that i was aware of that took the long-term perspective and treated their employees well. very inspiring!
kareem
Carmine Coyote Said,
July 17, 2007 @ 6:52 pm
I suspect the analysts don’t even think of employees as servants or resources. They think of them as costs: to be eradicated, if possible, and minimized, if not.
That’s the accountant frame of mind that we have allowed to happen by treating business as purely about money and ignoring its social and community impact.
Nothing will change until we demand that work becomes more civilized.
Capt. Jean-Luc Pikachu Said,
July 17, 2007 @ 7:02 pm
That article was written exactly 2 years ago. Has Wall Street changed its analysis since then?
Wall Street analysts live in an alternate universe « Later On Said,
July 17, 2007 @ 7:47 pm
[...] in Business at 10:52 am by LeisureGuy Read this—and think about the likelihood that Wall Street analysts would say that their own pay and [...]
bill Said,
July 17, 2007 @ 7:51 pm
It makes perfect sense if you’re focused on money, don’t believe in employee-driven productivity, and regard employees as infinitely interchangeable and replaceable.
Abomination Said,
July 17, 2007 @ 8:32 pm
Bravo to CostCo! This kind of company thinking is what Capitalism should be. The idea that a happy employee is a good employee is a self evident fact. I’m glad that somebody actually realized it.
On another note, it’s obvious that the something has got to change on wall st. The idea of cruelty turning profits screwed up on multiple levels. If an employee hates his or her boss, she may be tempted to sabotage aspects of the company, at worst, or they may simply become less concered with the quality of their work, a best.
An underpaid CEO? How radical! Said,
July 17, 2007 @ 10:01 pm
[...] Analysts to Costco: Stop treating your employees so well [...]
How to have an average company. < Spare Change. Said,
July 17, 2007 @ 10:46 pm
[...] as resources, that like any other corporate item must be bought as cheaply as possible,” points out Andrew Kjerulf. This is false economy, because your employee are not a cost center. They are a profit center, [...]
Howie Said,
July 18, 2007 @ 4:03 am
Happiness will always prevail. Those analysts don’t know how happiness affects the performance of employees. Perhaps they didn’t experienced having wonderful bosses who treat they well.
Will Ashworth Said,
July 18, 2007 @ 8:42 pm
Another good example of paying employees well and getting great results is IN-N-OUT Burgers in California. They start their hourly employees at $11 per hour and store managers can only be promoted from within. If you want to be a store manager at the company, you must first be an hourly worker. How’s that for democratic capitalism?
They’re not public but a good example of how even a burger joint can do the right thing.
Helen Said,
July 19, 2007 @ 4:45 am
There’s a lot of reason why businesses fail to achieve greatness over their competitors and I think treating employees well isn’t one of them. I believe that happiness is a positive factor in the success of business and not a hindrance.
Alexander Said,
July 19, 2007 @ 10:17 am
Charlie: I agree! Costco certainly think so themselves. I’m sure they’re terribly nice people, but I’m sure thyy wouldn’t do it if they didn’t think it was good business.
Alec: It is. But it doesn’t have to be!
Tobey: Er… Thanks :o)
Kareem: Thanks for another great example. Craigslist is yet another company that Wall St. just doesn’t get.
Carmine Coyote: “the accountant frame of mind” – that’s it exactly! And not only is it bad for us, it’s costing businesses a lot of money!
Jean-Luc: Thanks for that – I’d complete missed the fact that the article is ancient. However… little seems to have changed in either the way Costco treat their people or how Wall St. treats Costco :o)
Bill: Heh :o)
Abomination: I agree – something has to change in Wall St. The question is, what till it take to change their obsolete mental model?
Howie: Yeah, maybe that’s it :o) Or maybe their world is just too focused on money – tho the point where they forget that this means that they MAKE LESS MONEY!
Will: Not bad for a burger joint. I hear the burgers are pretty good too :o)
Helen: You’re right and studies confirm this!
Personal finance at KMull.com Said,
July 24, 2007 @ 9:15 pm
[...] has a sad, yet funny article posted up today about how Costco treats its employees very, very well. And Wall Street analysts don’t want them to do [...]
“Stop Treating Employees So Well” Pt.2 « WeirdGuy Said,
August 1, 2007 @ 5:12 pm
[...] learned surprised him and will more than likely surprise many of you as well… In my last post I wrote about how Costco treats its employees better than their competitors, get huge profits as a result – and catch flack for it from stock analysts who want them to spend [...]