Later On

A blog written for those whose interests more or less match mine.

Wall Street analysts live in an alternate universe

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Read this—and think about the likelihood that Wall Street analysts would say that their own pay and benefits should be cut:

You’d think that if a company treats its employees well (a lot better than their competitors) and gets great business results because of it, that this company and it executives would be celebrated and praised for it.

You’d be wrong.

The New York Times has a great article about Costco, the huge American chain of supermarkets who spend much more on their employees than their main competitors:

Costco’s average pay, for example, is $17 an hour, 42 percent higher than its fiercest rival, Sam’s Club. And Costco’s health plan makes those at many other retailers look Scroogish.

According to Costco’s CEO Jim Sinegal, this makes good business sense:

Good wages and benefits are why Costco has extremely low rates of turnover and theft by employees, he said. And Costco’s customers, who are more affluent than other warehouse store shoppers, stay loyal because they like that low prices do not come at the workers’ expense. “This is not altruistic,” he said. “This is good business.”

The results are pretty impressive:

Costco’s stock price has risen more than 10 percent in the last 12 months, while Wal-Mart’s has slipped 5 percent. Costco shares sell for almost 23 times expected earnings; at Wal-Mart the multiple is about 19.

So how do stock analysts react to this? They tell Costco to start treating their employees worse:

Emme Kozloff, an analyst at Sanford C. Bernstein & Company, faulted Mr. Sinegal as being too generous to employees, noting that when analysts complained that Costco’s workers were paying just 4 percent toward their health costs, he raised that percentage only to 8 percent, when the retail average is 25 percent.

“He has been too benevolent,” she said. “He’s right that a happy employee is a productive long-term employee, but he could force employees to pick up a little more of the burden.”

This makes zero sense to me – but it illustrates two things perfectly:

  1. Traditional business thinking in some areas still regards employees as resources, that like any other corporate item must be bought as cheaply as possible.
  2. Executives who believe in treating employees well are faced with pressure from analysts and the stock market to stop doing so and start being more like anyone else – regardless of the results their strategy has been getting them so far.

This is partly why Jim Goodnight, the CEO and owner of software company SAS Institute refuses to take his company public; he knows that it would become much more difficult to keep SAS employees as happy as they currently are (read about how SAS keep their employees happy).

One company did manage to go public and keep their identity: Google. When they announced their IPO, founders Brinn and Page made it very clear that they would continue to run the company their way. They promised to go on treating their employees extremely well and making long-term decisions rather than living from quarter to quarter. If investors didn’t care for that, they were kindly requested to take their money elsewhere. Google being Google, investors flocked to buy the stock anyway – less famous companies might not get away with this approach.

To me, it makes perfect sense that treating employees well makes them happy and that happy companies make more money – and this is backed up by many studies. To give one example, the 100 best companies to work for in the US, have outperformed the general stock market by a factor of 3.

It’s time that investors and stock analysts realized this and started demanding of companies, that they make their employees happy. This not only increases profits, it’s one of the best and most efficient ways to do so.

Chances that companies will do this? I would say less than 1%.

Written by LeisureGuy

17 July 2007 at 10:52 am

Posted in Business

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