Costco pays double and crushes competitors

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Think paying employees more hurts profits?

Wall Street certainly does. But here's something that might surprise you: Jim Sinegal built Costco into a $240 billion company while paying employees nearly double what competitors did. Analysts constantly criticized him for it.

His response? "I just think people need to make a living wage with health benefits. It also puts more money back into the economy and creates a healthier country. It's really that simple."

Costco's employee turnover was 6% when competitors averaged 60%. Their customers were fiercely loyal. Their sales per square foot crushed the competition.

Sinegal proved that treating payroll as your best investment, not your biggest cost, creates advantages that penny-pinching competitors can never match. And he wasn't alone.

Sinegal's "overpaid" workforce advantage

In 1983, Jim Sinegal co-founded Costco with a philosophy Wall Street hated: pay employees generously and they'll take care of customers generously.

While Walmart paid minimum wage with minimal benefits, Costco paid an average of $20-24 per hour in the 2000s and 2010s. They provided comprehensive health insurance to part-time and full-time workers. They promoted almost exclusively from within.

Wall Street analysts repeatedly called Costco's labor costs "too high." Investors pressured Sinegal to cut wages and benefits to boost margins.

Sinegal refused every time. He understood something the analysts missed: low turnover saves massive amounts of money in training and productivity.

Costco's employee turnover was around 6% annually for employees past their first year. Competitors like Walmart and Target saw 60% or higher. That difference meant Costco employees knew the products, understood the systems, and provided better customer service.

The result? Costco members renewed at over 90% annually. That loyalty created predictable revenue that low-wage competitors couldn't match. Costco grew to over 800 warehouses generating $240 billion in annual revenue.

Sinegal's "overpaid" workforce became his competitive moat.

Kelleher's no-layoff profit machine

Here's one that defied every airline industry norm: Herb Kelleher founded Southwest Airlines in 1967 with a radical idea. Treat employees like family, and they'll treat customers like guests.

While other airlines viewed labor as a cost to minimize, Kelleher viewed employees as Southwest's most valuable asset. He implemented profit sharing, giving employees significant ownership stake. He created a fun, supportive culture where personality mattered as much as skills.

Most importantly, Kelleher committed to never laying off employees for economic reasons. When recessions hit and other airlines cut thousands of jobs, Southwest kept everyone employed.

This created fierce loyalty. Southwest employees consistently ranked among the most satisfied in any industry. They voluntarily took pay cuts during tough times to avoid layoffs. They worked harder because they knew the company valued them.

The payoff was extraordinary. Southwest became the only consistently profitable major U.S. airline for over 40 consecutive years. While competitors went bankrupt repeatedly, Southwest thrived. They maintained the lowest costs per seat mile while paying employees well.

Happy employees created operational excellence that low-wage competitors couldn't replicate. Faster turnarounds. Better customer service. Fewer complaints. All from treating people as investments.

Hsieh's culture-first billion-dollar exit

Tony Hsieh took Zappos from startup to $1.2 billion Amazon acquisition in 2009 using an extreme version of this philosophy.

Zappos famously offered new employees $2,000 to quit after their first week of training. If they took the money, they weren't culture fits. Hsieh wanted only people who genuinely wanted to be there.

He invested heavily in employee happiness and training. Zappos spent weeks training customer service reps when competitors spent days. They empowered employees to spend whatever necessary to delight customers, no approval needed.

The call center, typically viewed as a cost center to minimize, became Zappos' competitive advantage. Representatives weren't measured on call time. They were encouraged to connect genuinely with customers. The longest Zappos call lasted over 10 hours.

This people-first philosophy created customer loyalty that justified premium prices and drove word-of-mouth growth. Zappos grew to over $1 billion in annual sales before Amazon bought them, largely to acquire their culture and customer service approach.

The people-first pattern

Here's what these three understood: Employees who feel valued create customers who feel valued. That emotional connection is worth more than margin optimization.

Sinegal's well-paid Costco employees knew products and helped customers genuinely. Kelleher's loyal Southwest employees made flying fun and efficient. Hsieh's empowered Zappos reps turned customer service into competitive advantage.

Wall Street saw costs. They saw investments that compounded.

Why people over margins works

Low turnover compounds expertise

Training new employees is expensive. Keeping experienced employees creates institutional knowledge and efficiency that constantly churning workforces never achieve. Costco's 6% turnover versus 60% competitor rates meant their employees were dramatically more productive.

Employee loyalty creates customer loyalty

Customers feel the difference between employees who care and those going through motions. Southwest's culture-fit employees made flying enjoyable. That experience created brand loyalty worth billions.

Empowered employees solve problems faster

Zappos reps could spend whatever necessary to fix issues. That empowerment created legendary customer service stories that generated free marketing worth millions.

Building your people-first advantage

Calculate full cost of turnover

Beyond hiring and training costs, turnover destroys productivity and institutional knowledge. What would 10x lower turnover be worth to your business?

Pay enough that money isn't primary concern

When employees worry about bills, they can't focus fully on customers. Paying living wages with good benefits removes that distraction and creates genuine engagement.

Promote from within aggressively

Costco promoted 98% of management from hourly positions. That path created loyalty and showed everyone their potential future with the company.

Measure employee satisfaction as seriously as profits

These three companies tracked employee happiness metrics as carefully as financial ones. What you measure, you improve.

The conventional business wisdom says minimize labor costs to maximize profits. These three proved the opposite.

Investing generously in people created customer loyalty, operational excellence, and brand strength that cost-cutting competitors could never match.

Sinegal's Costco thrived while competitors struggled. Kelleher's Southwest profited for 40 consecutive years while the industry hemorrhaged losses. Hsieh's Zappos became so valuable that Amazon paid $1.2 billion largely for their culture.

Treating payroll as investment instead of cost doesn't hurt margins. It creates advantages that make margins almost irrelevant.

Who are you investing in?

Emil | Founder of Income Ivy