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Wage Against the MachineIf Costco's worker generosity is so great, why doesn't Wal-Mart imitate it?

By Liza FeatherstonePosted Friday, June 27, 2008, at 7:29 AM ET

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In an interview, Costco CFO Richard Galanti told me that by offering higher pay, Costco can hire "better-quality employees." To Galanti, workers are a retailer's "ambassadors" to the public. Costco may be able to attract people with more experience, education, or a better "attitude" (e.g., a more obliging smile or the realization that it's better not to chew gum or file your nails on the job). All of that's probably true, though tough to quantify—and tougher still to measure the effects of such worker quality on Costco's business.

Even so, investors in recent years have rewarded Costco significantly more than Wal-Mart, which may suggest that Wal-Mart's public black eyes scare Wall Street to some degree. Probably the worst publicity Wal-Mart has received for its employment practices was in 2004 and 2005. During these two years, developments in the sex-discrimination suit drew attention to its plaintiffs' charges; numerous communities blocked Wal-Mart from expanding stores; many news stories exposed child labor, overtime abuses, and exploitation of undocumented immigrants; labor and community groups were constantly picketing the retailer; and two well-funded national organizations formed with the express purpose of publicizing Wal-Mart's crimes against its workforce. All of this may have had some effect: From Jan. 1, 2004, to Jan. 1, 2006, Wal-Mart's stock was down 9.7 percent. Costco's went up an impressive 37 percent during this time. (The S&P went up 14.5 percent.)

In the subsequent two years, the discrepancy has only deepened, tending to confirm Galanti's argument that in the long term, higher wages are "a great model." Indeed, analysts' consensus on Costco's long-term growth expectations is better than their consensus on Wal-Mart: 13.3 percent as opposed to 11.7 percent, respectively. That's intriguing because Wal-Mart is more profitable and has demonstrated better earnings growth (12.47 percent five-year earnings-per-share growth as opposed to 9.8 percent for Costco). Employee relations may be part of the picture, but Galanti points out there are many other reasons for analysts' confidence in Costco. "Seventy percent of our earnings come from membership fees," he says. "We'd really have to screw up to lose that!" Costco may also be more recession-proof than other discount retailers, because its customers are richer and because it sells so much food relative to other goods. "Even in an economic downturn," Galanti says, "people still have to eat."

So why does Costco bother being nice to workers, given that it is so difficult to calculate a clear payoff for decency? One reason is old-school: a union. About 11 percent of Costco's 127,000 employees are represented by the Teamsters Union, while not one Wal-Mart employee is a union member. Not that Costco is a Swedish paradise of labor-management cooperation. "We wish they [the union] weren't there," Galanti admits, "because we don't feel we need a third party to talk to our employees." Yet the relationship shows that even a lackluster union like the Teamsters can help make life better for employees.

Another factor is the personality of the CEO. In my interview with Galanti, he mentioned Jim Sinegal every couple of minutes, attributing the company's high wages to the CEO's personal values. CFO Galanti acknowledged having at times argued with his boss, urging him to curb Costco's generosity on health care. (Sinegal eventually agreed with him, reluctantly, in 2003 but insisted that care remain affordable to employees.)

Sinegal's kindliness is impressive, but he's also 72 years old and thus won't be around forever. Perhaps he's created a corporate culture strong enough to outlast him, but that's impossible to predict. And until Costco boosters can make a concrete case that the company's generosity—however welcome—has a duplicable effect on the company's bottom line, it seems unlikely that a crowd of Jim Sinegals is going to emerge in the nation's executive suites.

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Liza Featherstone is the author of Selling Women Short: The Landmark Battle for Workers' Rights at Wal-Mart and recently completed a Knight Bagehot fellowship in business and economic journalism at Columbia University.

Photograph of Costco by Justin Sullivan/Getty Images.

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