Pay and benefits

How Costco saves taxpayers money

June 11, 2013: 10:16 AM ET

The discount retail chain has remained steadfast on giving decent pay and benefits for its rank and file, saving the company -- and U.S. taxpayers -- plenty of money in the process.

Shoppers buy goods at a Costco store in New York, NY, Monday, March 11, 2013.

FORTUNE -- Can a company with a low-price strategy afford to pay employees higher wages? Costco seems to think so. And in doing so, Costco saves taxpayers money. Employees like Amie Crawford and Stephanie Sanders would like to see their employers give this approach a try.

Fifty-six-year-old Amie Crawford, who graduated with an associate's degree in interior design from the Art Institute of Pittsburgh and had a successful 30-year career as an interior designer, never thought she'd be in a job where the average take-home pay was less than a fifth of what she had made before. Her current take-home pay of $788 per month from the Protein Bar won't pay for her Chicago apartment and allow her to put food on the table. She's been looking for a job in her field, but there just aren't any openings, she says. So, for now, she has to supplement her income with food assistance from the government, she told me, something she never would have imagined.

Stephanie Sanders, who recently wrote an eloquent op-ed for the Milwaukee Journal Sentinel about her experiences, used to be a successful cosmetics salesperson earning $16.25 an hour plus commission until the recession put her out of work. Sanders, 33, wrote that she had that job for six-and-a-half years and has tried to find other sales work. She now works at McDonald's making $7.25 an hour and relies on food stamps to get by.

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Both Crawford and Sanders would like to earn enough to pay their own way and not rely on government assistance. While their employers let taxpayers pick up the slack, that's not the attitude Costco has assumed.

Pat Callans, vice president of human resources and risk management at Costco (COST), doesn't fit the normal HR profile. A lawyer by training, he's held various roles at the company including one in operations before taking on his current position six months ago.

A combined human resources and risk management title is highly unusual. But it makes sense: People are both a company's biggest risk and strongest asset.

Callans says Costco pays starting hourly workers $11.50 to $12 per hour with increases in pay after just 800 hours of work. "It's the philosophy that the founders [Sol Price and Jim Sinegal] brought that if you pay competitive wages and great benefits, you'll attract great employees," he says. At Costco, "the average hourly wage in the U.S. is a little over $21 [this includes wages and overtime pay but not extra "bonus" checks], Callans wrote me. Both full- and part-time hourly workers receive bonus checks of around $5,000 annually starting around the five-year mark.

Callans says paying well ultimately saves Costco money. The company gets tons of applications and can afford to hire selectively. And it also doesn't incur the high costs of turnover that other companies must deal with. In fact, turnover at the company runs just 10% overall for hourly workers and 6% if they stay longer than one year, he told me. Those figures are miniscule compared to overall turnover rates of 67% for part-time staffers and 24% for full-timers, according to statistics from the Hay Group.

Hay estimates that for "an organization with 10,000 employees, a 10 percentage point reduction in turnover over two years would result in savings of $17.5 million (assuming an average salary of $35,000 and an average replacement cost of 50% of salary)," according to a recent press release.

Low turnover "allows us to pay good wages because we are not spending time, money, and resources filling positions," Costco's Callans told me.

Callans says the firm is also proud of the benefit package it offers, which includes health, vision, dental, and 401(k) programs for both full- and part-time workers. (The waiting period is 90 days for full-time workers and 180 days for part-timers.) Ninety percent of employees are eligible and 98% of those who are eligible are enrolled, he says. Union workers for Costco in California also have a defined benefit pension plan.

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Protests by workers at other companies without these levels of pay and benefits are starting to have an effect. CNNMoney recently profiled several fast food and retail workers who have received more hours, promotions, and higher wages after protesting their employers' practices.

As a co-founder of a workers organizing committee in Chicago, Crawford says she has found her voice. "Most people don't realize that this doesn't just impact high school and young people. But I feel blessed to have the opportunity to have my eyes opened to how many people are struggling, facing intimidation [at work], with threats that if you join a union there will be repercussions, even though it's illegal, and where foreign people are threatened with deportation even if it's not true."

Right now, Crawford's committee is working toward a national $15 per hour living wage. That rate is necessary, particularly in higher-priced metro areas. For example, in the Poughkeepsie, N.Y. area, you need to earn $16.40 per hour and in New York City $22.90 per hour to afford an efficiency (or small studio) apartment, according to Looking Up at the Bottom Line author Richard Troxell's calculation of the universal living wage. In the D.C. area, it's $21.73 per hour, and in Oakland it's $17.15.

Callans says Costco pay is not adjusted based on location. He had not heard of the $15 per hour pay campaign though he was aware of movements to raise the minimum wage to $10 to $11 per hour. He did say, "Costco is a leader in the retail space and wants to be seen as the leader in paying competitive wages and benefits."

Everyone who works hard wants to be self-sufficient, but until companies pay a living wage "your tax dollars are subsidizing McDonald's (MCD), Wal-Mart (WMT), and Macy's (M)," Crawford told me, adding that she hopes to bring about improvements not only for herself but for those she has met along the way.

Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.

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