Costco vs Walmart

This paper will discuss the viability of increasing wages to attain higher productivity rates in the workplace. I will argue that implementing a wage increase for current employees will not necessarily result in higher productivity and that productivity is more so a function of innate skills and abilities than pay rate. Costco claims they receive high productivity rates in return for paying their employees high wages. This does not necessarily mean that implementing a wage increase at a chain like Sam’s Club, owned by Wal-Mart, for current employees will provide the same productivity results.

Currently Wal-Mart and its subsidiaries operate on the mission of “Always Low Prices, Always” (81). Wal-Mart achieves these low prices through “low wages for its employees, unrelenting pressure on suppliers, products cheap in quality as well as price, (and) offshoring jobs”(81). Cascio argues that there may be an alternative to the way that Wal-Mart runs it’s business where they are able to offer low prices while paying employees well and providing desirable returns for shareholders (81). Cascio bases this argument on the premises that Costco, a store with similar objectives to Sam’s Club, is able to successfully run a profitable business not at the cost of employee wages, quality of product, return to shareholders, or profits (81). Costco believes that providing higher wages results in higher productivity (82).

On average they pay their employees $6.89 higher than Wal-Mart employees and provide above average benefits yet most agree that they are still the lowest cost provider (82). Costco is also very concerned with quality of product; when purchasing merchandise they seek out value that they measure by the product quality rather than the price, a differing tactic from that of Wal-Mart (84). Even with higher than average wages and benefits to shareholders Costco provides good returns to it’s shareholders where in a 5 year comparison between Wal-Mart and Costco, Costco saw 45% more growth than Wal-Mart and traded at 24.8 times expected earnings, 7.4 times higher than Wal-Mart (84).

Lastly, in providing good wages and benefits to employees, low costs to customers on quality products, and creating value for shareholders, Costco saw revenues of $43.05 billion, 5.95 billion higher than Sam’s Club with 38% less employees (87). Cascio argues that Wal-Mart need not pay their employees low wages to keep shareholder returns high and suggests that by paying their workers higher wages they should be able to reap the benefits of more productive workers (82). This argument is flawed especially if productivity is viewed as a function of innate ability instead of pay.

It is possible that Wal-Mart is able to employ workers at a lower wage than Costco because the pay matches a more inferior set of skills and abilities that their employees have explaining why the people they hire are willing to work at this wage. If this is the case then giving a pay raise, as it will not specifically increase workers’ skills, may not result in an increase in productivity for Wal-Mart. If Wal-Mart were to increase pay without seeing an increase in productivity it would lose profits resulting in a lower return for shareholders, something that would be seen as an irresponsible and unethical decision for a public company whose duty is to create value for shareholders.

Although it may be true that an increase in wage will not increase productivity in current workers, Wal-Mart has the option of seeking new employees who have skills and abilities that prove to be more productive than those of current workers and attracting them by offering higher wages. Offering increased wages will attract employees with higher skill levels who would be unwilling to work at the lower wage previously offered. In pursuing this option Wal-Mart will be able to reduce their workforce over time through employing more productive workers at a higher wage thus offsetting the increased labour costs. Since the productivity benefits of the new workers will outweigh the cost of increasing wages Wal-Mart can continue to provide sufficient returns to shareholders and will operate effectively as a responsible public company.

While it may be an option for Wal-Mart to increase their productivity by attracting more skilled workers through higher wage incentives this course of action proves to be unethical on a few fronts. Firstly, by hiring new workers at a higher wage current workers will become displeased as they may interpret it to be unfair even if the pay is based solely on skill. Also, by employing new, more productive workers, the average skill level of the workers hired at Wal-Mart will change meaning that an outlet of employment for lower skilled workers has been taken away and may result in higher unemployment for people who fall in this skill level. If unemployment rates for less skilled workers were to increase it might cause an excess need for social welfare programs.

Essentially, if Wal-Mart changed it’s hiring practices to employ more skilled workers they may take away jobs from people currently qualified to work there, possibly hurting communities it chooses to locate itself in if. Although Costco may believe that it sees high productivity rates because of its high wages it may not be easy to implement this in already existing workplaces. It would be socially irresponsible of Wal-Mart to increase wages if it resulted in angering current employees, taking jobs away from them, or increasing the need for social welfare in communities that it operates within. Although there may be an alternative to the way that Wal-Mart operates in creating low prices for consumers, a wage increase for employees in expectations of higher productivity is not the best solution.

Works Cited

Cascio, Wayne F. “Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club.” Academy of Management Perspectives (2006). Rpt. in Ethical Theory and Business. Ed. Tom L. Beauchamp, Norman E. Bowie, and Denis G. Arnold. 8th ed. Upper Saddle River, NJ: Pearson/Prentice Hall, 2009. 80-90. Print.