The old business paradigm, according to which a company should try to maximize economic profits as much as possible, even at the expense of its employees, is becoming increasingly obsolete over time. Smart and innovative companies like Costco (NASDAQ:COST), Whole Foods Market (NASDAQ:WFM) and The Container Store (NYSE:TCS) are proving that making employees happy may actually be the best way to generate superior returns for investors.
Costco, the anti-Wal-Mart
Although Costco is usually compared to Wal-Mart Stores' (NYSE:WMT) Sam´s Club, the two companies couldn't be more dissimilar in their values and strategy. In fact, a 2005 article from The New York Times actually described Costco as "the anti-Wal-Mart" based on the multiple differences among both companies when it comes to issues like labor relations.
While Wal-Mart has been widely criticized because of its insufficient wages, poor working conditions and low benefits; Costco has chosen a very different approach. According to Bloomberg BuisnessWeek, Costco pays its hourly workers $20.89 an hour versus an average wage of $12.67 an hour for full-time Wal-Mart employees. Costco also offers more generous benefits like health care and 401-K plans and it provides more opportunities for professional growth and promotion to employees of different levels.
Co-founder and former Costco CEO Jim Sineagal explained quite clearly to the New York Times that this innovative approach to human resources in the retail industry does not come at the expense of shareholders:
"This is not altruistic. This is good business."
Costco's success over the last years is proving that lower employee turnover, higher productivity and better service can be very profitable for investors in the long term. The company has outgrown competitors like Wal-Mart and Target by a considerable margin, and investors are getting rewarded with return rates which are not only outperforming the competition but also doing much better than the S&P 500 index over the last five years.
Healthy leadership at Whole Foods
John Mackey co-founded Whole Foods Market in 1978, and he has led the company from a single store in Texas back then to more than 360 stores and growing. This has been very beneficial for Mackey financially, but money is far from the only thing on his mind.
Mackey is a major proponent of "conscious capitalism," a way of thinking about capitalism and the role of businesses in the economy that is more conscious of its higher purpose and the relationships it has with its various constituencies and stakeholders. Mackey said in an interview with Bloomberg last January:
"I really don't think shareholders should come first, I think it's fundamentally a bad strategy... Happy team members result in happy customers; happy customers result in happy investors. If you put shareholders first, you won't get there."
Whole Foods caps executive compensation at 19 times the average employee's salary and Mackey himself makes only $1 annually. The company pays above average salaries and has a smart incentive program allowing employees to financially benefit from improved productivity in their stores: when costs in relationship to revenues go down, employees receive a percentage of those savings, so it's in their best interest to make sure that things are running smoothly and efficiently.
Whole Foods is a very profitable company, with operating margins of 6.7% versus an industry average of 3% according to data from Morningstar. Happy employees are in fact making investors happy too, at least according by the stock´s performance over the last few years.
This store contains happy employees
Kip Tindel, founder and CEO of The Container Store, shared a house with John Mackey and three other three other students near the University of Texas campus in Austin during the 1974-75 school year. Like Mackey, Tindel is a pioneer of the conscious capitalism movement, and he has built a strong culture for The Container Store around those principles.
The company offers more than 263 hours of formal training for full-time employees in their first year and The Container Store has been on Fortune's list of the "100 Best Companies to Work For" in each of the past 14 years. Tindel believes that that selecting only the best people and paying them superior salaries can be very beneficial in terms of productivity and profitability:
"Pay them one and a half to double the going rate. If they are giving three times the productivity of a good person, this is actually more cost-effective."
The company has produced growing comparable store sales over the last 13 consecutive quarters and margins are improving lately, so The Container Store may easily become profitable on a GAAP basis in the coming quarters. The Container Store had its IPO in November, so it's far too soon to make a long-term assessment about the stock, but the shares are off to an auspicious start over the last few weeks.
Shareholder value does not need to come at the expense of employees. On the contrary, attracting and retaining the best people can be a powerful strategy to maximize returns in the long term. At the end of the day, the best business managers may be those who do a better job at hiring and properly incentivizing employees as opposed to shortsightedly focusing on cost reductions by any means possible.