There is no doubt that a well-designed compensation philosophy is vital to a company’s success. Employees are responsible for the execution of corporate goals, and compensation programs should be developed to drive such behavior which will allow a company to successfully execute its strategy. In addition, in today’s ferociously competitive business environments a compensation program becomes an effective recruitment and retention tool.
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These facts highlight the need of the businesses to consider including compensation philosophy development in their overall strategic goal-setting process and adjust it to meet the changing needs of the organization and its employees. This paper seeks to address the issue of compensation philosophy and the factors which influence its development in an American retailer Costco Wholesale. An improved philosophy is proposed with the focus on contributing to the development of the organization.
Costco Wholesale Corporation is an American retail company that operates through membership warehouse concept. The company’s warehouses are open only to members and their guests and sell a limited selection of merchandise.
The company’s mission is to continually provide their membership base with quality products and services at low prices. The word “continually” is used in the company’s mission statement and implies that the company’s management realizes the importance of continuous improvement. As such, the company’s philosophy should also be influenced by the notion of continuous improvement.
In reality, however, the company’s compensation philosophy has remained largely unchanged over the years. Costco’s compensation programs are designed by the Compensation Committee which consists of three independent directors. This committee is solely responsible for compensation levels of executive and non-executive directors. The historical success of Costco’s compensation programs is the key internal factor which explains top management’s reluctance to change their programs.
Current Compensation Philosophy
The focus of Costco’s efforts is to create a comprehensive compensation program and use it as a tool to retain quality managers and attract new ones. The company’s financial performance allows it to actively use compensation programs to develop employee loyalty. In different management ranks, the company’s compensation program has proven to be successful.
The objective of Costco’s current compensation philosophy is to “motivate all our executives and employees to continue to feel part of our Company and to participate in the growth of our business” (Costco Wholesale DEF 14A 2008, 2008).
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While the company recognizes the role of managers in achieving company’s goals, the contribution of lower-rank employees is also accounted for. Currently, the company motivates their employees with higher wages and better benefits than those offered by other retail companies such as Walmart.
Proposed Compensation Philosophy
Costco Wholesale operates in a ferociously competitive retail industry. This industry is dominated by several large companies, including Wal-Mart Stores, Inc., The Home Depot, Inc. and Target Corporation. The competitive business environment is the key external factors which should influence the development of the company’s compensation philosophy. As such, the company’s compensation philosophy should be driven by the need to provide such compensation which will be higher than the industry average but will be driven by goal setting and performance assessment.
In order to do that, proposed compensation philosophy is based on pay at risk concept, which suggests reducing the fixed component below market average, but increasing the incentive component significantly above it (Biswas, 2014). Such philosophy incentivizes the employees to work towards improving the company’s financial performance since it is tied to the employee’s individual compensation.
Key factors of the proposed compensation philosophy which should contribute to the company’s development are:
- Providing compensation at levels above market average for the entire workforce. In order to facilitate growth, Costco has to consider providing compensation at levels which will exceed market averages for the entire workforce. This will allow the company to remain competitive, improve employee job satisfaction and in turn, improve the quality of the company’s services.
- Connecting employee compensation to the company’s performance. By using the pay at risk concept, the company should reduce fixed part of the compensation but significantly increase the incentive part. The second part should depend on the employee’s contribution to the achievement of Costco’s strategic goals.
- Increase the total compensation above market average. If pay at risk concept is utilized, it will allow the company to provide compensation above the average in the market, but on the condition that the company’s financial targets are met. This fact will allow the company to manage risks and compensate the employees based on their abilities and contributions.
Costco’s current compensation philosophy is developed with the focus on building employees’ loyalty and retaining top talent. While successful, Costco’s compensation philosophy should also account for the changing needs of the organization and employees. The competitiveness of the retail industry necessitates the development of such compensation philosophy which will value individual contribution to the company’s development and will be based on risk-adjusted performance. Compensation programs should also be competitive in order to retain top talent and help the company achieve its goals. The proposed philosophy is aimed at improving the competitiveness of Costco’s business and improving its performance.
Biswas, B. (2014). Employee Benefits Design and Compensation (Collection). New Jersey, United States: FT Press.
Costco Wholesale DEF 14A 2008. (2008). Web.