Costco and other retailers prove a ‘good jobs’ strategy works

Person working at a warehouse

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BOSTON—A common argument executives make against raising wages for retail workers is that it would force them to increase prices and lose their competitive edge. But retailers such as Costco are proving that higher wages and increased benefits can actually boost both productivity and profitability.

When companies focus on minimizing labor costs, workers often wind up underpaid and undertrained, and faced with unpredictable work schedules. This can make their lives difficult, and result in low morale, operational inefficiencies, and higher turnover rates, said Zeynep Ton, president of the nonprofit Good Jobs Institute and a professor at the MIT Sloan School of Management.

“Tens of millions of essential workers live in a vicious cycle of poverty and lack dignity, which also hurts their companies,” Ton said in a TED Talk earlier this year. (Ton also presented her research to Harvard Business School faculty as part of a 2023-2024 seminar series at the Institute for Business in Global Society.)

Companies may save money initially by paying lower wages but wind up spending some of those savings later in the form of rehiring, retraining, mistakes, and lost sales.

“Absence of sufficient pay guarantees high employee turnover,” Ton said.

A two-part solution

Ton is the author of the book, “The Case for Good Jobs: How Great Companies Bring Dignity, Pay & Meaning to Everyone’s Work,” and works to convince companies to improve company personnel practices.

But creating “good jobs” isn’t just about giving employees more money. That alone would probably result simply in higher prices or lower profits, Ton said. Instead, a two-part solution is needed to make positive change.

“One is investment in people: pay, schedules, career paths, standards,” Ton told The BiGS Fix. “It’s also making their work more productive and motivating by removing waste, empowering workers, and making sure there is enough slack in the workforce to get the job done and deliver good service.”

At one time or another, we’ve all experienced the ripple effect when there isn’t enough “slack” in the workforce. For example, when you’re in a store and head to the checkout line only to find that there are only a few registers open, and the lines are long. Customers start to get grumpy, and some choose to abandon their carts because they don’t have the time to wait. When there are appropriate staffing levels, shelves are full and the lines keep moving, eliminating undue stress on customers, and sales aren’t lost.

One of the examples Ton cited of a company that has successfully implemented a good jobs strategy was Costco, the world’s third-largest retailer. Costco pays its workers an average of $26 an hour, far more than the average $17 an hour paid by other retailers, according to data from Costco and the Bureau of Labor Statistics. (The federal minimum wage in 2024 was $7.25 an hour, which rises to a nationwide average of $9 an hour when state and local minimums are incorporated, according to IBISWorld, which provides industry research.)

The warehouse club also offers excellent medical and retirement benefits and tends to promote executives from within the company. The results are staggering: Costco’s turnover rate is about 8%, a sharp contrast to a whopping 60% at other retailers, according to research from The Economist cited by Ton.

Costco co-founder and former CEO Jim Sinegal took some heat from Wall Street over his decision to prioritize employees, but he firmly believed in the strategy. Sinegal has repeatedly been quoted as saying that paying workers well is not just altruism. It’s good business.

Lower turnover, higher sales

Sinegal didn’t just talk the talk, he walked it, too, taking a salary of $350,000 for many years, when the industry average for Fortune 100 CEOs was closer to $1 million a year.

The idea is that, when employees are happier, they’re more productive and provide better service to customers. There is also less turnover. That means lower costs and higher sales.

Sinegal’s belief in the strategy as a path to success was reflected in Costco’s stock price, which outperformed not only the retail sector but the S&P 500 for decades.

When John Furner, former CEO of Costco's rival Sam’s Club, decided to raise wages, he faced pushback from HR, the finance department, and others within his company. But, as Ton said, he “could connect the dots between pay, turnover, productive work, and competitiveness.”

The result? In just two years, productivity increased by 16%, turnover dropped by 25% and sales rose by 25%.

“This type of performance improvement fueled more investment in people and record membership growth,” Ton said. “The once-struggling chain is now a growth engine for its parent company, Walmart, which too is on a good-jobs journey. And John Furner got promoted to be the CEO of Walmart USA.”

In fairness, both Costo and Sam’s have annual membership fees, which are a key part of their profitability. And, because they buy only select merchandise and purchase it in bulk, they can keep prices lower and margins higher. But Ton, whose Good Jobs Institute has worked with more than 30 companies that want to adopt a “good jobs” approach, said she has seen similar results at all kinds of companies, including supermarkets, convenience stores, restaurants, and call centers.

Case studies on ‘good jobs’

Ton has also done case studies on Mercadona, Spain's largest supermarket chain, and QuikTrip, a U.S. convenience store chain with gas stations, which have both successfully implemented a “good jobs” strategy.

Mercadona’s approach is to focus on stakeholders, not just profits, including: “the boss,” which is how they refer to their customers internally, employees, suppliers, society, and capital. They pay their workers above the industry average, offer bonuses, have generous parental leave and child-care policies, and invest in training. Mercadona can make this employee investment because their work is by design more productive. They offer fewer products and always low prices, cross-train workers and empower them to make decisions, they give workers enough time to do a good job and be involved in improvement. Since they adopted this strategy in the late 90s, they’ve seen labor productivity, profitability, and market share grow.

“Companies cannot turn their backs on society,” Mercadona President Juan Roig wrote in a letter to shareholders. “We have an obligation to contribute to the creation of wealth and wellbeing so that society recognizes the value of having more and better companies."

QuikTrip pays above-average wages, offers bonuses, and has generous benefits including paid time off, profit-sharing, a 401(k), health care, and scholarship programs. Like Mercadona and Costco, they cross-train and empower employees so they can solve their problems, cover other jobs, and operate with slack lowering the risk of losing a sale because a customer had to wait too long or the shelf wasn’t stocked, according to Ton.

QuikTrip’s employee turnover rate is a fifth of the industry average and its labor, space, and inventory productivity are significantly higher than the industry average

In each case, a “huge part of their success was their leaders' ability to imagine the workings of their own good-job system, and have the courage to adopt it,” Ton said. “When we think about high-performance organizations, our first instinct is often to fix the people, right? But it turns out what really needs fixing is their work and their pay.”

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