Compensation Plans Research Paper

Length: 6 pages Sources: 3 Subject: Business Type: Research Paper Paper: #9820760 Related Topics: Executive Compensation, Compensation Management, Onboarding, Apocalypse Now
Excerpt from Research Paper :

Compensation Plan

Brief Overview of Costco's Compensation System

Costco has a unique compensation system within its industry. The company competes as a cost leader, where it features low prices as a means of winning business. Cost leaders typically try to have rock bottom costs throughout their operations, from the supply chain to labor and everywhere in between. These competitors will use their bargaining power to get the cheapest labor possible, bargaining down wages, benefits and other perks. This often results in a poor quality labor pool with high levels of turnover, but these companies accept that as part of having a low cost labor pool and account for that is the design of the low cost business model (Lutz, 2013).

The approach that the company has to compensation is therefore counterintuitive to the way that most of its competitors run their human resources, but there is internal logic to Costco's system. Costco is famous for paying its employees a living wage and providing good benefits to its employees. This approach is based on a unique perspective, that the company wants to look at the entire cost-benefit of its workforce, not just its cost.

Evaluation of Costco's Compensation

The underlying logic of the Costco compensation system is that the company will attract better workers if it pays a proper wage and benefits, and it will be able to retain them as well. This is basically the logic of labor unions, but without the union part -- you get professionals, not workers, and you keep them. The higher wages and benefits paid to employees are weighed against a number of other costs that are lowered. The first is that turnover costs are lower. Turnover results in higher costs because of a) the cost of acquiring new employees and b) the cost of onboarding new hires. New hires are also less efficient workers, so having experienced workers is likely to improve the efficiency of the company overall (Gray, 2014). Efficiency is one of the major ways for companies that compete with a cost leadership platform to lower their costs throughout their operations. Costco is essentially operating on the principle that there are subtle benefits throughout their company that arise that will offset the higher upfront costs associated with its pay and benefits policies (Goldberg & Ritter, 2005). Further, the company feels that loyal employees are also going to provide better service. While this might be true, service is not the main thing on which Costco competes, so it does come down to whether or not the Costco compensation strategy delivers a low total cost for the company.

While Costco seems convinced that its strategy works, there is not necessarily any clear evidence to support this. There are a number of measures that could be used to evaluate the effectiveness of the strategy. The first is total profit and market share. On those measures, Costco has performed well. The company earned $1.96 billion last year, and with $105 billion in revenue is the 2nd-largest retailer in the United States (MSN Moneycentral, 2014). On those terms, Costco has become an enormously successful company. A direct comparable is Sam's Club, which is owned by Wal-Mart, and operates with the same warehouse store strategy, but with Wal-Mart compensation policies. Costco is destroying Sam's Club in the market, which is a good sign for the Costco business model. Costco customers are also more loyal, again highlighting that the company is doing something right. The question remains, however, how much role the compensation policy plays in that.

The compensation strategy is designed to improve efficiency. At this point, Costco's net margin is 1.9%, compared with 2.7% at Target and 3.3% at Wal-Mart. While the cost leadership model relies on using slim margins to increase market share, that would only explain why Costco's slimmer margins help it beat Target; it does not explain Wal-Mart, which earns better margins and has a bigger market share. Sam's Club is the best comparable, and has an operating margin of 3.4% (2014 Wal-Mart Annual Report). Costco's operating margin is 2.9%. On that measure it seems that Costco is paying more for something than Sam's Club is, but those slimmer margins should correspond with higher market share in this industry and they do in this case. The data here then is inconclusive. What can be determined for certain is that Costco...

...

The company's approach is to run against the industry norms, from the front line workers right to the CEO. Costco does not advocate external consistency, and part of this is that the company is not trying to attract the same people. The company wants workers who are better educated, more experienced, and have a lot of loyalty. This is an entirely different type of worker than the ones normally hired by cost leaders, who prefer to hire people that have no education, skills and are prone to turnover. Costco feels that it can get by with fewer workers and that the overall costs will be lower (or at least equivalent) than those of competitors.

It could be argued that at the higher levels, some degree of external consistency is important. Costco recognizes that it will need to compete with other companies in retail for senior management talent. This is why the company emphasizes internal hiring, because it knows that its own people are highly motivated and loyal, so that they want to stay at Costco. The company does not want to get into bidding wars for executive level talent -- it believes that the challenges associated with running a $100 billion business should allow it to attract some considerable talent, and they are right. This approach has worked well, and Costco is one of the best-run companies as a result, without overpaying for executives.

Internal consistency is very important at Costco. The company typically bases its internal consistency on tenure and job performance, which is a bit old-fashioned in some circles, especially the tenure part. But many of the company's workers are comfortable staying in their jobs for years, and the tenure increases are not massive. The workers have somewhat limited bargaining power to the extent that many do not want to leave the company; but that loyalty is related to them being paid well. Nevertheless, Costco does try to have a high level of internal consistency in its pay.

Recognition

The Costco compensation model is based on creating a system where employees are able to make significant contributions to the company. The recognition of these is primarily on the overall level where people are well-compensated and there is an understanding that this will result in better performance and ongoing contributions to the success of the company. The second element of recognition is that Costco hires internally, so employees who are seeking a pathway to moving forward will receive that. Recognition in the form of promotion opportunities is important, and Costco is a believer in creating this form of intrinsic motivation, rather than offering cash rewards for performance. Senior managers might receive stock options, however, as part of their performance reward. This is based primarily on the need to be externally consistent with respect to equity-based compensation. Even where base executive pay is lower than average, linking compensation to the value of the company's stock creates significant motivation, and goodness knows the stock has performed well over time.

Recommendations

Discretionary benefits are not a major theme at Costco, but they can still have some value. Many employees do not seek promotion, so some element of discretionary benefits is needed to provide greater reward for performance among employees who otherwise are happy to remain in their current position. Occasional rewards can be used to create motivation in the workforce. But it should also be noted that financial rewards should be kept to a minimum because of their cost, and instead most reward should be in non-financial forms. Evidence shows that things like positive feedback are correlated with better behavior (Deci, Ryan & Koestner, 1999).

A second recommendation is to set benchmarks for executive and senior management-level discretionary benefits. These benchmarks should be external in nature. The market for senior managerial talent is competitive, and right now Costco relies heavily on its own people. As the company grows, and other companies provide a similar positive environment but better compensation, Costco might find it tougher to get the right people into senior management positions. This is something that the company needs to take into account -- it needs to be externally competitive in the market for senior talent.

Retirement

Costco provides retirement benefits for its employees, which is something that Wal-Mart often does not do, at least not for its part-timers. Full-time employees at Wal-Mart have retirement plan options. Even part-timers at Wal-Mart are offered a 401K option with company match. Costco's…

Sources Used in Documents:

References

Costco. (2014). Benefits. Costco. Retrieved May 31, 2014 from https://costcobenefits.com/cms/your-wealth/401k/index.shtml

Deci, E., Ryan, R. & Koestner, R. (1999). A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin. Vol. 125 (6) 627-668.

Goldberg, A. & Ritter, B. (2005). Costco CEO finds pro-worker means profitability. ABC News. Retrieved May 31, 2014 from http://www.sba.pdx.edu/faculty/susanm/semaccess/BA%20385/Costco%20CEO%20Finds%20Pro-Worker%20Means%20Profitability.doc

Gray, C. (2014). Tangible benefits of reducing turnover. Houston Chronicle. Retrieved May 31, 2014 from http://smallbusiness.chron.com/tangible-benefits-reducing-turnover-21668.html


Cite this Document:

"Compensation Plans" (2014, May 31) Retrieved May 11, 2021, from
https://www.paperdue.com/essay/compensation-plans-189577

"Compensation Plans" 31 May 2014. Web.11 May. 2021. <
https://www.paperdue.com/essay/compensation-plans-189577>

"Compensation Plans", 31 May 2014, Accessed.11 May. 2021,
https://www.paperdue.com/essay/compensation-plans-189577

Related Documents
Compensation Plan: The Ability of a Company
Words: 1265 Length: 4 Pages Topic: Military Paper #: 78215264

Compensation Plan: The ability of a company to attract and retain the personnel it needs is partly dependent on its ability to provide competitive compensation packages. A company's compensation program is vital for its competitiveness since it's the basis for rewarding employee input. In order to ensure that the workers are effectively compensation, the firm should develop and establish an effective compensation plan. For the Department of Defense, there is need

Compensation Plan Outline
Words: 2019 Length: 6 Pages Topic: Business Paper #: 27681365

Compensation Plan Outline Ford Motor Company is the largest manufacturer of heavy commercial vehicles and second largest producer of automobiles in the world. Their range of vehicles comprises 70 different types that include Jaguar, Lincoln, Volvo, Mercury, Aston Martin, and Ford with presence in over 30 countries worldwide. Ford employs over 300,000 employees across the globe. In the United States itself, Ford has an employee strength nearing 100,000 employees and sales

New Compensation Plan for My
Words: 858 Length: 3 Pages Topic: Business - Advertising Paper #: 51805391

The sales person is driven by their target, as to fail to meet the target would not only be financially costly but embarrassing. The second target, the hard-to-achieve target -- is something that the salesperson can take pride in achieving. Attaining this target means more for the success and improvement it represents than for the payout that comes along with it. The third component is the Top Performer incentive. For

Interclean New Compensation Plan for the Employment
Words: 701 Length: 2 Pages Topic: Careers Paper #: 54313877

Interclean New compensation plan for the employment team As a result of the changes which have recently been implemented within InterClean, a new need arises in the necessity to align the compensation plan with the new organizational features. In other words, the changes implemented would only succeed if they are adequately supported by the staff members and a means of attaining employee support in times of organizational change is that of readdressing

Managerial Decisions: Structuring Compensation Plans Economics /
Words: 549 Length: 2 Pages Topic: Business - Advertising Paper #: 67715088

managerial decisions: Structuring compensation plans Economics / Chapter 14 Firms attempt to create attractive compensation plans in order to retain as well as motivate qualified employees. These compensation plans will vary among firms due to factors such as the nature of the product, competition, and location. In this particular case, Kaufmann's is a large chain department store which carries a broad range of products with a target of middle income consumers.

Components of an Executive Compensation Plan There
Words: 685 Length: 2 Pages Topic: Economics Paper #: 7469147

Components of an Executive Compensation Plan There are five basic components of an executive compensation plan: Basic salary: although formal job evaluation still plays a crucial role in determining executive base salary, other sources tend to be more important. Most important is the opinion of a compensation committee, usually composed of the organization's board of directors. In most cases, the compensation committee takes over some information analysis previously done by the