You've probably already heard about Costco's
- CEO Jim Sinegal earns a mere $350,000 per year, with a bonus of as much as $200,000 (and possibly some stock). He aims to earn no more than three or four times what his highest-paid store managers earn. "Having an individual who is making 100 or 200 or 300 times more than the average person working on the floor is wrong," Sinegal has said.
- Costco pays its employees relatively lavishly. Workers reportedly start at $10 or more per hour, considerably more than elsewhere, where minimum wage is the usual starting point. According to a 2008 SmartMoney article, average pay topped $18 an hour, fully 68% more than employees earned at Wal-Mart's
(NYSE:WMT) Sam's Club, and more than BJ's Wholesale(NYSE:BJ) employees earn, too. Roughly 85% of Costco's employees had health insurance last year (at fairly cheap rates), versus only about half at Wal-Mart and Target(NYSE:TGT) . All this leads to low turnover, saving the company money on recruiting and training new employees, and helping Sinegal argue that it's simply a rational business practice. - It's a rule at the company that no item can be marked up more than 15%. You'll find markups much higher elsewhere (though you'll usually be unaware of it) -- supermarkets mark up items by about 25%, on average, and department stores like Nordstrom
(NYSE:JWN) , Dillard’s(NYSE:DDS) , or Macy's(NYSE:M) can tack on 50% or more.
Footnoted.org blogger Michelle Leder recently praised a lesser-known Costco advantage: its contract with its Sinegal. It's just a single page long, and it really doesn't even take up the whole page. Typically, CEO contracts at large companies can run for dozens of pages, detailing lots of benefits and perks, not to mention gobs of dollars.
My research turned up even more good things about Costco, including its win-win environmental policy. The company aims to use skylights as much as possible in most of its stores. This cuts down considerably on energy costs, but also provides soothing natural light for customers and employees. In addition, the company is investing in solar panels for its rooftops, with every intent to recoup its costs in short order.
The dark side
Few companies -- or people -- are perfect, and Costco's no exception. For one thing, the company's been hit with a class-action lawsuit claiming that it has not promoted enough women. (Costco has filed arguments against the suit.)
Some critics might also argue that by treating its employees so well, the company is shortchanging shareholders. True, if Costco were less generous with employees, there might be more money available to pay shareholders as a dividend. But then turnover might rise, dragging costs along with it.
The best counterargument to criticism of Costco's high salaries is the company's recent track record:
- Per Morningstar.com, the stock is up an annual average of 4% over the past three years, 9.9% over the past five, and 6.7% over the past decade. All of those numbers beat the S&P 500 by 10 or more percentage points.
- Its dividend yield is around 1.3% -- far from generous, but not insignificant. That payout's been hiked an annual average of about 12% over the past four years.
- Our CAPS community has rated Costco four stars out of five, with more than 2,300 community members predicting it will outperform the market. Among our most accurate All-Star players, 94% rating Costco expect outperformance.
The bottom line, for me, is that Sinegal's formula seems to be working well -- after all, the company is the nation's biggest warehouse chain. Costco is living proof that doing good and doing well aren't mutually exclusive, and it inspires me to seek other companies that make a profit while still rewarding employees and shareholders alike.
Now, wait a minute ...
Before you charge off to buy shares, we recommend you take the time to do a bit more digging of your own. Our Motley Fool Stock Advisor newsletter includes Costco on its roster; with a free 30-day trial, you can read our top advisors' analysis on the company.
