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An Examination of the Exercise of Corporate Social Responsibility of Costco Wholesale Corporation and Target Corporation

Executive Summary

This report seeks to explore how Costco Wholesale Corporation and Target Corporation, two strong competitors in the retail industry, exercise their corporate social responsibility (CSR) initiatives in terms of compensation. Their vast labor size and influence within the industry requires them to prioritize their employee relations. Facts regarding financial data, human resources statistics, and other company information were collected from the MSCI database, company websites, news articles, and accounts of employee treatment.

Healthy labor relations have a direct impact on society and are a major part of a company’s proposed CSR initiatives, not only developing a strong public image, but also helping increase company revenue.

Introduction:

Costco Wholesale Corporation and Target Corporation are both major players in the retail sector. That being said, Costco dominates the Warehouse Club and Supercenter industry while Target leads the Department Store industry. Both companies have taken different paths to delivering value, with Target prioritizing brand development and convenience while Costco looks to build an almost egalitarian culture and sustaining a loyal consumer base. While they differ in their respective business models, they both devote time and resources to CSR initiatives.

Central to any business model is a company’s customer value proposition (CVP). Target prides itself on training and maintaining well informed and helpful employees, which they claim are their competitive advantage and a big part of their shopping experience. As such, compensation of employees heavily comes into play when regarding their value proposition.

Costco’s CVP promotes delivering value and providing their employees with a support system, minimizing turnover rate as much as possible. The actions taken by their management stress their commitment to their team members. Costco is considered an industry leader in social initiatives by putting effort into goals regarding stakeholders. They have maintained a loyal customer base by creating a wholesome experience that is largely dependent on a strong relationship with its employees. Conversely, Target has managed to attract and maintain customers by building a reputation on evolving value that falls in line with consumer trends and expectations. Ultimately, their differing business models translate into diverging labor management practices.

The Issue and Why it is Important:

With an increased focus on CSR, in terms of the ethical treatment of a company’s employees and the relationship with management, modern-day corporations are pressured to provide value to society in addition to merely satisfying shareholder needs. Due to their large workforces, both Target and Costco are constantly faced with the challenge of balancing shareholder and employee interests. This being said, the most visible facet of employee treatment is their pay, and this is where these two companies diverge in policy. While Target has denied continued calls from within to raise their wages, Costco’s proactive compensation practices have assuaged this concern.

It is vital for a company to provide strong management practices as employees are a firm’s greatest asset and can lead to increased company success. As Beryl Companies CEO Paul Spiegelman stated, employees are the “most important stakeholders in a corporation” and “if you want employees to take a vested interest in the bigger picture, treat them like stakeholders” (Spiegelman). Good employee treatment leads to workers feeling valued and respected, which in turn is believed to result in increased customer satisfaction. A study published in the Journal of Applied Psychology used meta-analysis to find a substantial correlation between employee satisfaction and meaningful business outcomes such as profit and employee turnover (Harter, Schmidt, Hayes). The type of healthy relationships described by this study can in part result from fitting pay. Additionally, the supply of jobs in the retail industry has been exceeding demand, creating tightness within the market (Peterson). Therefore, companies are feeling increased pressure to improve employee treatment and relationships to better retain and attract workers.

Key Affected Stakeholders:

There are many relevant stakeholders regarding the issue of employee treatment and pay for both corporations. These include stakeholders such as employees, management, consumers, shareholders, and competitors. Although most stakeholders hold similar stances and saliences between Target and Costco, differences exist between management, employees and competitors, influencing their CSR (Figures A and B).

Stakeholder Stances and Salience:

Employees

The stakeholder most impacted by any action taken on the issue are the employees (Market/Internal) of each respective company, as they are affected directly by company policy (Greenspan). In several instances, both Target and Costco’s employees have expressed concerns regarding fair wages, benefits and labor standards. Costco boasts a worker-centered culture. The regard that management holds for employees comes from their “3=1 rule” which states that one good employee is worth three lesser ones (Taube). Costco’s employees have also joined unions that Costco Wholesale Corporation is willing to work with, therefore having higher salience in comparison to Target workers (Levine-Weinberg). Target’s employees also want to see their wages and benefits increase, but they are playing catch-up. Due to Target’s anti-union culture, employees have lower salience as their management is not entirely willing to cooperate with them (Zillman). This being said, unsatisfied employees make credible threats to strike although their power at the bargaining table is somewhat undermined by the large number of part-time workers who hold less credibility than their full-time coworkers (Bose).

Management

Management (Market/Internal) in a corporation is responsible for setting out guidelines and value propositions regarding employee relations, making it clear that this issue directly relates to their actions. Although both company’s value propositions are geared towards delivering value to consumers first and foremost, they both clearly state in respective mission statements that their responsibilities start with employees and then consider their consumers and community. Management can either be for or against the betterment of employee treatment and pay, depending on what they ultimately choose to prioritize in terms of delivering value (Krogue). Management’s high salience comes from their legal power and decision-making abilities, as they create policies, manage salaries, and deal with public perception.

Costco’s management works with unions to resolve conflict, indicating that they realize that their company’s profitability is directly contingent on maintaining good employee relationships (Levine-Weinberg). While most employees are not part of a labor union, workers in California have unionized through the Teamsters and resolve disputes through them. Costco’s workers and management are generally able to come to terms, in large part due to the image that the management wants to maintain of satisfied workers. It is worth noting is that Costco’s CEO earns about 20 times the pay of its average employee whereas Target’s CEO makes 146 times the average employee’s wage (Cardenal). Costco’s management recognizes the importance of investing in employees and is willing to take a salary cut in order to do so. This dichotomy shows a distinct difference in corporate culture between the two companies. However, while invested in the idea of treating employees well, the management is motivated to curtail some benefits due to their growing impact on the bottom line (Levine-Weinberg). And while Costco’s workers have some say on the issues, it is the management that must consider the growing cost of present and future employee benefits.

Target’s management, without the worker-centric mentality of Costco’s decision-makers, is against increases to wages and benefits largely due to the possible impact on profits. They have a higher level of salience than employees do due to their corporate mind-set and discouragement of unions (Zillman). Though their workers have not had great success in lobbying for wage hikes, competitors’ actions have caused the management to increase pay. Wal-Mart’s recent pay increase pushed Target to respond with their own raises. While the management conceded a pay raise, it may not a have a great impact due to the large proportion of Target employees who are part-time, and thus unaffected by this shift (Bose).

Consumers

Consumers (Market/External) often choose to shop at places that correlate with their personal values and moral standards. Externally, both Target and Costco boast stellar employee treatment procedures, compared to their competitor Walmart (Cardenal). Scandals and lawsuits involving Target and Costco are often successfully masked to the public. In terms of salience, consumers possess high economic power as they could choose to boycott the company, yet rank relatively low due to their lack of urgency. The dearth of consistent and complete information has hindered their use of economic power.

Shareholders

Shareholders (Market/External) are relatively less involved in the issue of employee treatment and pay, but tend to be invested in the good health of the company. By the tenets of stakeholder theory, as well as considering the value propositions of these respective companies, firms must focus on employee treatment first and foremost to deliver highest returns. Shareholders possess a fair amount of salience due to their voting power, which translates to their influence over the financial activities of a company (e.g. employee pay). In particular, Target’s shareholders have a loud voice in the actions of their management. This is due to the reasoning that Target is a more volatile company and has delivered less growth, forcing shareholders to get more involved in order to feel that they are protecting and growing their investments (Hansen). Target’s stock price has grown only moderately over a five-year period, picking up 31% (Figure C). This growth, however, has come through a series of crests and troughs which may agitate investors. Shareholders may put up with this volatility due in part to the attractive quarterly dividend of $0.60/share as opposed to Costco’s mellower $0.45/share (Street Insider). Costco’s shareholders are more confident in the corporation’s ability to provide steady returns, giving no major pushback on company policy. Over the same five-year period, Costco’s share value has consistently risen, presenting an impressive 76% increase (Figure D).

Competitors

Competitors (Nonmarket/External) can affect the actions of both companies in terms of employee policies, pay, and treatment. Target’s recent increase in the minimum wage was in response to competitor Walmart’s increase in their base salary (Bose). This is an example of how Target is directly impacted by their competitors on issues of employee pay and treatment. Unlike Target, who is dragged by trends, Costco sets the tempo (Taube). Although competitors hold high informational power and have proven that their actions clearly impact the decisions of Target and Costco, they lack the ability to directly implement change and therefore hold moderate salience.

Responses to Stakeholder Pressure:

Target

Target has long believed that having happy and healthy team members will translate to increased customer satisfaction, more active involvement in their communities, and overall better company success. Although Target is known to be “the better Walmart,” it continues to be heavily criticized for its labor practices, ranking in the third quartile according to the MSCI ESG rating (Target Corporation ESG Rating). Despite claiming to support employees, Target’s history shows that they refuse to concede to complaints of poor employee treatment.

Target has always been fiercely anti-union, forcing its employees, and management, to watch anti-union videos as part of their training (Wang). These videos, coupled with the corporate culture are meant to frighten employees by highlighting that unionizing would threaten their jobs and Target’s competitiveness in the price-driven retail industry. This has been very successful in undermining unionization efforts and suppressing employee complaints. In 2011, at a Target store in Valley Stream, New York, employees made an effort to unionize in order to improve their wages, but were met with rejection (Greenhouse). They claimed that they faced illegal threats of termination for displaying union support, and were forbidden from wearing pro-union buttons. After the National Labor Relations Board found Target guilty for violating federal labor laws, management denied these allegations and stated that Target “firmly believed that it had followed all laws at the store and that the election had been fair” (Greenhouse). In retaliation, Target supposedly offered buyouts to workers who had voted “yes” and made them sign an agreement to not speak to the media about the failed union campaign (Both). This significant event highlights Target’s strong anti-union culture, which has persistently suppressed employees’ concerns, further increasing tension between workers and management.

Target has increased its minimum wage twice in the last two years; in April 2015 it raised it to $9 and most recently, in April of 2016 it increased it to $10, following Walmart (Huffington Post). Target’s reluctance to increase its minimum wage based on its own initiative reflects poorly on the company, as it suggests that Target cares more about keeping up with their competitors than the consistent concerns of their employees. Additionally, Target is currently a defendant of two class-action lawsuits regarding non-payment of overtime work of operations group leaders in New York and California (Target Corporation ESG Controversies). Similar to the Valley Stream case in 2011, Target has denied these allegations stating that the group leaders are categorized as managers who do not require additional pay. Consequently, the number of Target employees has been decreasing since 2013 (Target Corporation ESG Rating).

Costco

Costco is known for treating its employees well and having a generous benefits plan. The company takes pride in strictly following its Code of Ethics, which ranks employees over shareholders (Code of Ethics). However, beneath the surface, things might not be as pretty as they seem. The MSCI ESG ratings report puts Costco in the third quartile when it comes to labor management (Costco Corporation ESG Rating).

In January of 2015, the company faced a major class-action lawsuit over alleged unpaid overtime wages, denial of breaks, and other labor violations in California. The lawsuit claimed Costco employees would work through unpaid lunch breaks and be wrongly clocked out, despite still being on duty. While it was ruled in February 2015 that Costco owed $17 million in unpaid wages for missed lunch breaks alone, they relented and moved the case to a federal court. Though the case has not concluded, Costco has shown a willingness to compromise (Chicago Overtime Law Center).

In spite of these controversies, Costco has maintained healthy employee relations by implementing plans and policies that benefit its workers. In March of 2016, Costco increased the minimum wage for the first time in nine years to $13-13.50 per hour, 80% higher than the current US federal minimum wage (Pettypiece). Despite pressure from shareholders and investors, Costco refuses to cut wages and benefits. When asked if Costco could make more money by lowering their average wage by 20%, the CFO responded with, “The answer is yes. But we’re not going to do that” (Berman). Thus, the average Costco worker makes about $45,000 per year compared to Target’s $22,260 (Glassdoor). This high compensation is reflected in its low 6% employee turnover rate when compared to the average 27% in the retail industry as of 2014 (Peterson).

Approximate Cost of the Firm’s Response:

Target

Target’s management, on the other hand, gains from not paying its employees as high of salaries as Costco does in the short-run. It is evident through Target’s board and CEO’s income, that they are able to compensate for themselves because of a lower cost for employees. Though this is a solid short-term strategy, they are likely to pay the cost in the long-term due to possible employee instability that can eventually lead to customer dissatisfaction and lower sales revenue. In order to prevent this from happening in the future, Target must identify and realize the value in their employees.

Although Target’s shareholders are enjoying higher dividends and compensation due in part to lower salaries of the company’s employees, these dividend payouts are only guaranteed in the short-run, with a possible decrease in the future. As in the case of Target’s management, it is most optimal for the shareholders of Target to focus on the employees to ensure stability. As for both employees and customers, Target’s actions regarding employee salary directly impacts their stakeholder groups’ satisfaction, which could lead to the company’s eventual turmoil.

Costco

Overall, Costco’s strong focus on its relationship with its employees has played a crucial role in its performance. Stemming from a strong financial investment in its employees, Costco is able to motivate them to perform better, consequently leading to greater revenue within the company. Although Costco does have to put more financial effort in its employees than its competitors do, this cost is minute in regards to the return on this investment. And so, although Costco may take a slight loss by paying their employees in the short-run, the long-run benefits of increased revenue that come from higher employee performance certainly outweigh the initial investment per employee. In essence, by abiding to its corporate responsibility of fair employee compensation, Costco is able to establish a strong image of itself and gain financially in the long-run.

Costco is able to satisfy some of their most important stakeholders such as employees, customers, and shareholders by paying their workers an above average salary. By having high pay and fair treatment, employees are satisfied with their management and therefore perform better as workers. Consequently, this performance leads to more satisfied customers, who are able to have better experiences during their shopping trips to Costco. On the other hand, although shareholders do not initially gain from the higher salaries of employees, the constant cycle of satisfied employees and customers leads to higher gains for the company, and eventually higher dividends for the shareholders (Cardenal). Shareholders, although not guaranteed a high dividend payout because of the higher salaries, are warranted a steady rate of growth over time due to the stability of the company.

Conclusion:

While Costco and Target operate in a very similar market, the manner in which they handle their labor management problems varies greatly. Target’s attitude, as shown through its lawsuits and the large disparity between management and worker pay, is one that does not put a high regard on employee compensation. As such, this response is indicative of Target’s focus on dictation rather than cooperation as a means of problem-solving. Conversely, Costco approaches its labor issues not with the intention of winning arguments, but finding common ground.

Although both approaches are legitimate, the more amicable one is more effective as a

means of labor management. On paper, this is demonstrated by the fact that each Costco employee generates almost three times the revenue for the company than their peers (Figure E). This fact also circles back to the idea that better employee treatment is beneficial to the bottom line. On a human level, this is supported by the low employee turnover rate that Costco boasts. By focusing on strong labor relationships as a key component of its CSR initiatives, Costco is able to maintain steady growth and practice positive business.

Both firms are proponents of stakeholder theory, but they execute it with regard to different CSR initiatives. While Costco’s actions demonstrate their emphasis on labor as a primary stakeholder, most of Target’s focus is on other stakeholders, namely the community and shareholders. The stakeholders which these companies cater to are influenced by their CVPs. Target is focused on delivering a quality shopping experience through convenience and intelligent branding which relates to its focus on supply chain and technology rather than the customer-employee relationship. Conversely, Costco is more focused on delivering value through customer service and a wholesale model. These emphases create a pro-employee corporate culture. This is exemplified by their CEO who is known to make visits to stores and interact one-to-one with employees. Target’s leadership has taken a different approach, focusing on technical means to augment profits.

Both of these companies have had success in the past, but the retail industry’s evolution represents challenges to both of them. To sustain profits, Target will have to make a greater investment in their team members and acknowledge their salience as a stakeholder group. While Costco’s approach to employee pay has struck a happy medium between profits and people, they will have to find ways to sustain their practices even as markets tighten and costs rise.

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