Did you ever wonder why it is that jobs that can be done cheaper in Bangladesh don't instantly migrate there? Yes, yes, I know that there are plenty of jobs, particularly in the textile and manufacturing businesses, that have in fact gone to some of the places in the world with substantially lower average wages. But why haven't all of them? Bangladesh isn't even the country with the lowest per-capita wages in the world: Why haven't all of the jobs gone to economic disaster zones like Angola?
It's simple -- because rock-bottom wages aren't in and of themselves helpful if they come at the expense of productivity. Countries that provide the largest output per unit of labor cost, on the other hand, have an extreme advantage. In some cases -- in many cases -- that country isn't some struggling third-world place -- it's the U.S.
So why wouldn't the benefit of paying higher wages for higher productivity not hold true for other large organisms, like corporations? In a recent fantastic BusinessWeekinterview, James Sinegal, the CEO of wholesaling giant Costco (Nasdaq: COST), said he believes this to be the case with all his heart, and he stakes his shareholders' money on it. In the past few years, folks on Wall Street have complained bitterly that the high wages Costco pays its rank-and-file employees come at a cost to shareholders.
I disagree. And further, I wonder why these same characters aren't jumping up and down about the massive executive pay packages that are the norm in Corporate America. A company can't pay its employees enough to make sure they're happy? My friend Paul Orfalea, who founded Kinko's, staked much of his company's success on this one thing -- making sure his customer service employees had "happy fingers." The theory is simple: There is a direct positive correlation between the overall success of the business and the happiness of the employees who interact with customers every day. The end result of this is that Costco never has to look outside for executive talent, that it promotes from within.
The problem for Sinegal and other public companies that operate the same way -- Kinko's having been private prior to its purchase this year by FedEx (NYSE: FDX) -- is that it's awfully easy to measure "lost" profitability by looking at an income statement and subtracting back just a tiny 1% reduction in salaries. It's simple to play sideline cost cutter, but it's impossible to measure the benefit of happy employees. Pay them less, and the whole culture changes. What else gets lost?
Note what we're not saying here. This is an economic transaction -- it makes no sense at all to overpay employees, and that added employee expense had best be exceeded by benefit to the corporation and to shareholders. But it's awfully simple to look at a Costco and say, "Well, if they just paid closer to Wal-Mart (NYSE: WMT) salaries..." Costco is not Wal-Mart. Sinegal isn't building a company that is a temple for Wall Street. He doesn't care what it thinks. As this classic opinion piece by Gregory DeFelice notes, Costco doesn't chisel its suppliers either. It is awfully clear that what Jim Sinegal has spent his life trying to build is a company that has one thing above all else: equilibrium. I'm sure it makes it easier and much more fun to manage the place when most everyone likes how they're treated.
How completely refreshing.
Be sure to read our coverage on Costco's earnings report, written yesterday by W.D. Crotty.
Bill Mann owns shares of Costco. Costco is a Motley Fool Stock Advisor selection. To see what other companies David and Tom Gardner are uncovering, consider afree trial. Did we mention the trial was free?
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