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Higher Salaries: Costco's Secret Weapon

The experiences of two big-box retailers prove that higher wages can lead to higher profits. Here's how to decide if this formula will work for your business, too.

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When someone says "Our People Make the Difference"... I always roll my eyes. We all hire from the same talent pool. No employer really has an advantage ... and no large group of people can be that amazingly different from any other large group of people.

Or so I thought -- until I read some amazing research that has convinced me that there is one way that employees can actually drive real differentiation and profits.

A Tale of Two Retailers

The research compares two well-known and very similar retailers in the United States:  Costco and Sam's Club.

The first, Sam's Club, pays employees an average of just over $11 per hour, and between 20-50 percent of its employees quit each year for various reasons. (I found conflicting data.)

Costco, however, pays employees an average of $17 per hour and replaces between 6-20 percent of its employees each year.  After four years with the company, a Costco cashier can make $40,000 salary plus another 10 percent of that in annual bonuses.

Said another way, Sams Club pays less for salary -- but up to 350 percent more for recruiting, hiring, and training expenses than Costco.

Even more impressive are the differences in sales at the two companies.  At Costco, where higher-paid employees stick around longer (and thus are probably better trained, happier, and more knowledgeable about the store), sales average $814 per square foot.

At Sams Club?  You guessed it -- just $586 per square foot.

That is 50 percent MORE SALES PER SQUARE FOOT AT COSTCO! Happy, motivated employees creating a healthy, profitable company.

But I think it's even deeper than that. If you are cynical and view people as a cost center (a place to make budget cuts), then you'll end up hiring the lowest-cost employees. 

Instead, look at people as an investment. Hire the best you can possibly afford. Motivate and encourage them. Train them.  Stretch to your limit to keep them excited about coming to work ... then watch as they actually perform!

Doing the Math

If a 50 percent increase in salaries can result in a 50 percent increase in sales... are you better off?

That's a math problem, to be sure (more on that in a second), but maybe it is also a human problem. Higher wages is not the only thing that keeps Costco employees happy at their jobs. There are huge differences in benefits, training, and management attitudes toward people, too. 

Another example, Starbucks, does not pay exceedingly well, but their employee loyalty is legendary thanks to healthcare benefits, flexible scheduling options, and a culture of caring.

OK, let's do some math.

If you want to experiment in your business, you could try to improve the culture and work conditions. Or you could increase wages.  There's a limit to how much you can increase a worker's pay, of course. But if you think better employees will help you sell more, then the formula to use looks like this:

(increase in total sales $) x (gross margin %) / (all hours worked) > (increase in hourly wage $)

This is simply how you say, "How much extra gross profit will better workers produce each hour?"

You can't give away all the excess, so the raise they get must be smaller than that hourly lift in gross profit.  (Note:  Why can't you give it all back to them?  For one thing, some expenses may rise along with sales, like the cost to order and carry extra inventory.)

Remember, the goal is to keep employees happier longer. Each time an employee quits, you lose. You lose a little piece of knowledge, but you also lose the time and money you've invested in recruiting, interviewing, hiring, and training.

The stakes are higher than you might think. How will you win the game? Leave me your thoughts below. I'd love to hear them.

Dedicated to your (Employee-Powered) profits,

David

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