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Sunday, January 16, 2005 - Page updated at 12:00 AM

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Pacific Northwest Magazine / Cover Story

Good Business: Two local companies are proving it pays to do well by workers

From a divided state in a divided country, Pacific Northwest magazine is exploring the gulf between us. In the coming months, we'll bring you stories from a variety of perspectives in hopes they'll shed light on our collective situation. Look for the logo Divided We Stand.

MARY GRAHAM'S morning shift usually starts at 5:30, but some days she's in the food court by 2 a.m., ponytail tucked in her regulation hairnet, spraying cleaner on the crud in the ovens and scrubbing until they gleam, work she must finish by dawn when the bakers come in.

So why is this woman smiling?

How about $13 an hour, waaay-fat for fast-food work in Washington? Full medical and dental benefits for herself and her five children under the age of 14? A scholarship program, and two weeks' paid vacation? A boss who helped arrange a schedule so she could be home to meet the school bus? "They are very respectful, they've been here before," she says of her managers — most of whom are promoted from within.

A single parent with a GED, Graham is no stranger to the lowest (legal) rungs of the economy. She's been a part-time receptionist for $7 an hour, no benefits; a waitress at a franchise diner where she had to share meager tips and couldn't afford the health-care plan. At 44, she has, as a service assistant in Costco's Issaquah food court, her first taste of the American dream.

"It's not minimum wage. I can afford a car. I can afford my kids' school clothes without help. I don't have to go to the food bank. I'm not on welfare. I appreciate it. I've never been able to do that before."

One reason, of course, is her employer.

Economists will tell you there are at least two reliable, legal ways to make money in America.

One is to fleece the workers, taking not only their wool but their skin. A proven model resulting, the Economic Policy Institute in Washington, D.C., tells us, in CEOs earning in a day and a half what took their beleaguered flock a year to earn in 2003.

Or, there's the Henry Ford model: Pay people well enough that they stick around, cutting both turnover and training costs while boosting efficiency. Better yet, pay them well enough so they can even go out and buy something. Witness Mary Graham, this year able to afford a flute for her daughter in band at school. She took a first-ever vacation at the beach with her kids last summer. Before, it was rides on the state ferries or walking around Seattle Center. She's even started saving in a 401(k) retirement account — which Costco contributes to, even if she doesn't.

Graham joined the company in 2000, slinging dogs for $10 an hour. By now, she knows every job in the food court, but one of her favorites is working the registers, where she enjoys putting a smile on customers' faces.

She doesn't even consider leaving. "Because of the pay and the benefits. I'm a Costco lifer."

Across town in the University District, employees at Dick's drive-in hustle burgers, fries and shakes, their work behind the drive-in windows a whirl of sizzle and steam.

Who hasn't done this, or something like it, on that first rung of the employment ladder? But how many had any reason to stay longer than a few months?

Such as the pay, which at Dick's starts at $8.50 an hour, with merit raises to more than $10, and fully paid medical benefits, even for part-timers. Then there's the tuition or child-care assistance — worth thousands of dollars each year.

No wonder Dick's turnover is about half the annual industry average of 200 percent.

Employees — and no, they are not all high-school and college students — work like devils, delivering the company's promised "instant" service without the dead-man-walking demeanor of the typical fast-food worker.

In some ways, Costco and Dick's couldn't be more different: Costco, headquartered in Issaquah, is an international company, one of the 10 biggest retailers in the world. Publicly held, partly unionized, Costco is on its way to passing $50 billion in sales worldwide this year. Dick's is a family-owned business, with five restaurants in Seattle, and no unions.

But their similarities are striking — and suggest it's possible to do well by employees and still make money, goo-gobs of money, whether a company is publicly or privately held, large or small, international or local, unionized, or not.

Both companies skip customer amenities and focus on a mission of delivering unmatched value in Spartan settings.

While other fast-food restaurants have added everything from onion rings to salads, at Dick's, they stick to the basics: burgers, fries and shakes.

The menu has seen only two additions since 1954, the Dick's Special, with lettuce, mayo and pickle, and the Dick's Deluxe, a hefty quarter-pounder with cheese. About the same time, Dick's dropped orange soda and added diet Coke, but "that's just about it," for menu innovation, says Dick Spady, a founder of Dick's.

Keeping it simple is keeping costs down.

Dick's even shuns indoor seating, realized as a spendy mistake after the company put seats in one of its restaurants.

"You have to heat it, clean it, staff it. All that costs money. That's going in the wrong direction for a business based on being low-cost," says Spady. Dick's, like Costco, promises to deliver the best quality at the best price.

Both companies rely on customers to spread the word, instead of expensive ad campaigns. Dick's rarely advertises, except in college and high-school newspapers. Costco never advertises and doesn't even have a public-relations department.

"What our customers say about us is so much more valuable," says Jim Sinegal, president, CEO and director of Costco.

Both companies swear by a long-term business strategy and operate their companies not to sell them but to perpetuate them.

Both preach a mantra of fairness to their customers, suppliers and employees, and a business ethic based on service.

"Every business has to make a profit or you can't survive," Spady says. "You can't take care of yourself, let alone anyone else. But my philosophy is, business isn't about exploitation, or even the bottom line, it's about filling human needs."

CEOs at both companies also say they feel a duty to their communities.

"A business exists in the context of that larger neighborhood context, and you have a responsibility to help it. As it goes, so you go," Spady says. "Every business has a responsibility to the common good. I call it civilization building, to try and make our world better."

And both run what are usually the dungeons of the economy — retail and fast food — as places where employees want to work.

What's more, both beat the competition doing it.

Those corporate softies at Dick's enjoy a profit margin well above restaurant-industry norms.

And at Costco? Its overhead costs were lower, its volume of sales per employee higher, and its total sales bigger in 2003 than its arch rival, Sam's Club, a subsidiary of Wal-Mart.

Yet, Costco's health plan covers a larger percentage of employees than Wal-Mart's does, and workers pay less for it. Costco, in fact, provides among the best wage-and-benefit packages in hourly retail. And it pays the same wage scale everywhere in the country.

A cashier at Costco can make more than $40,000 annually within four years. The average store manager makes $107,000, with a crack at $40,000 in performance bonuses on top. The company also pays hourly workers annual bonuses from $4,000 to $7,000.

No wonder they stick around: Turnover at Costco is less than a third the industry average.

NEITHER DICK'S NOR Costco claims to be an alternative to the system. What could be more mainstream than burgers, fries and selling stuff, lots and lots of stuff?

Spady and Sinegal are capitalists par excellence — which only makes their business strategy more interesting.

While not the only ones taking the high road on wages and benefits, both companies stand apart as service-sector employers. Which matters, folks, because that's where lots of the new jobs are, and where they are going to be.

That economic recovery we've all been hearing about? Maybe one reason the number of people without medical insurance is at a record high, and poverty rates are up, is because more than half of the net new jobs produced in America from May 2003 to '04 were service jobs.

Retail trade, temps, janitors, home-health aides and nursing-home workers, child day-care providers, food-service workers — all low-wage jobs, and more than half of them part-time, according to the federal Bureau of Labor Statistics.

And a bureau study predicts that between 2002 and 2012, most of the occupations with the largest job growth will pay low wages.

We're talking food-service and prep workers, customer-service reps, cashiers, waiters and waitresses, janitors, cleaners, housekeepers, retail sellers, nursing aides, orderlies and attendants — the people who make things nice for the rest of us — and take care of our kids and aging parents so we can go off to our interesting, high-wage jobs.

So where's the escape hatch? Education?

Nice try. But the reality is only about a quarter of American workers over age 25 have a four-year college degree.

Lots of people need work they can do with their hands and their hustle. And they are doing it: productivity is up, people are working more hours than in any other industrialized country in the world.

The problem is that in many, many jobs, hard work doesn't pay. Nearly a third of all full-time workers — tens of millions of people — make $9 an hour or less.

What's at stake in all this is a viable middle class, something America has always prided itself on. Who didn't grow up on the promise of the American dream: work hard, play by the rules, and at least be able to afford to take the kids to the beach or buy them a flute for band.

Paying more is just good business, both Spady and Sinegal insist.

"Who takes care of my customers? I can't do that. The people in our restaurants do," Spady says. "And they will only do that if they are well-treated, well-nurtured and appreciated."

Clearly, Spady didn't get the fleece-then-skin memo.

"Our business has been very successful," he continues serenely. "It keeps doing better and better. Of all the others that started out when we did in 1954, we are the only ones that are still here. What more proof do you need than that?"

Lately, Spady enjoys his days at his waterfront home; Sinegal's pay is nothing by typical CEO standards — he's taken no bonus and accepted the same salary of $350,000 the last three years — but no vow of poverty, either.

"We are not fighting the system," Sinegal says. "The system has been pretty good to us." He waves away deep analysis, saying his approach to business is pretty much a no-brainer.

"We are not inventing life here, we are selling mayo. Shouldn't the people who work for us be able to buy homes and send their kids to good schools? Those are not unusual expectations.

"You get what you pay for if you treat people well."

So why don't more companies do this?

Greed comes to mind.

Beth Shulman, author of "The Betrayal of Work, How Low-Wage Jobs Fail 30 Million Americans," sees an economy of complicity that translates into billions of dollars in profits in a gravy train of executive pay, fat stock dividends and low consumer prices. "Our recent prosperity rests in part on their misery," she writes of low-wage workers.

"America has always honored work, yet now finds itself in the position of degrading it."

THE FIRST CLUE at Costco is the carts: the SUV of shopping carts, they are for those too dainty to go for the full-on Costco rig: a wheeled flatbed hand truck. This is a store for people who'd better buy in bulk and like it.

The no-frills ethic extends from the warehouse floor to the executive suite: Sinegal answers his own phone, has no title on his business card, and had the walls taken down from his office, now basically a hallway with a desk. Ties are optional, and employee-parking spaces assigned by seniority, not rank.

At Costco's corporate headquarters in Issaquah, the "salmon story" on a plaque set in a burbling wall fountain isn't a warm and fuzzy rehash of the natural history of the noble chinook. It's a tale of the meat department nailing the best, skinless, farmed-salmon filet available for Costco customers.

Yes, farmed. Forget frou-frou organic this and biodynamic that, and food with precious pedigrees about third-generation farmers handwritten on (startling) price tags nestled in the track-lit produce display.

We are talking concrete floors and open shipping pallets, five-pound plastic clamshells of fresh blueberries for $3, Levi's for $21.99 ($48 retail).

Targeting upscale customers who enjoy a treasure hunt for a great buy, Costco sells more Dom Perignon champagne than any other retailer in the country and moved 18 percent of the world's consumption of cashmere in 2001 — more than a million sweaters for an astounding $49.99 each.

Started at the Fourth Avenue store 21 years ago, the company today is the ninth-largest retailer in the world, with 103,000 employees, more than 6,000 of them in the Puget Sound region.

With 1 million transactions a day, Costco has low turnover, 22 percent overall, compared with 65 percent typical in the retail industry. Shrinkage, as theft is charmingly called, is a fraction of the industry standard, too.

One reason might be that at Costco, employees can actually afford to shop.

HOW REMARKABLE is this? Consider that even in Washington, a comparative workers' utopia with one of the highest minimum wages in the country and a percentage of workers represented by unions nearly double the national rate, 1 in 5 full-time employees still makes less than $10 an hour.

The most recent state wage survey shows pay is growing slowest at the lowest end of the economy. And it's the rich who are getting richest, fastest: Their pay leaped 59 percent over a dozen years.

And even in Washington, the minimum wage of $7.35 an hour puts a family of four below the federal poverty line anywhere in the state, let alone in King County, where studies have pegged a living wage at above $11 an hour. Smile, Mary Graham, at $13 an hour, and full benefits.

Such benefits have grown scarcer as monthly premiums for family coverage grew dearer.

It's not because of globalization, the usual bugaboo of these discussions.

These low-wage jobs with crummy benefits are service-sector jobs. No one is outsourcing your hotdog counter to Mexico.

Instead, Eileen Appelbaum, an economist at the State University of New Jersey at Rutgers and director of its Center for Women and Work, sees two forces at work. A steady contraction of unions and abdication by the federal government of its traditional role in setting a reasonable minimum wage.

Union membership nationally has dropped by about half in the past 20 years, to fewer than 1 in 10 workers in the private sector. It makes a difference come payday — at last count, a more-than-$150-a-week difference. Union workers were also more likely to have health insurance and other benefits, and to pay less for them.

Meanwhile, workers in states paying the federal minimum wage are getting hosed. It takes an act of Congress for them to get a raise; their last pay hike was in 1997.

The federal minimum wage today is only a third of the average wage. It wasn't always this way.

In the 1950s and '60s, the federal minimum wage was equal to half the average wage. "That was a period when we had a lot of growth in the middle class. It functioned as a floor under employers," Appelbaum says. "But we have allowed the minimum wage to fall so low in relation to the average wage, it creates a domino effect; everyone is paying these low wages, how can you not, and Wall Street's attitude is if a company is good to its workers and its customers, how can it be good for its shareholders?"

The risk, of course, is creating the equivalent of the environmentalist's tragedy of the commons: Everyone takes as much as they want without restraint from a common resource, and pretty soon there is none of it left. The pasture is shredded, the forest chopped to smithereens, and so on.

Among economists, the equivalent principle amounts to a workforce so poorly compensated no one can afford to buy anything. Those poor skinned sheep again.

Of course, there's always debt. Total consumer debt in America, excluding mortgages, stands at more than $2 trillion and has more than doubled in less than 10 years. Personal bankruptcies are at record highs. Meanwhile, average wages of hourly, non-supervisory workers have grown, in real dollars, less than 50 cents an hour since 1964. Don't spend it all in one place.

This wasn't the idea, Appelbaum says. "Henry Ford understood if he wanted to sell cars, he needed workers who could buy them. If we want prosperous communities, we need a prosperous middle class."

Sinegal, at Costco, waves away any grand plan to save the American dream.

"I am not a social engineer," Sinegal says.

And, he doesn't have to be. Like Spady, his most convincing rationale for treating workers well is also the simplest:

"It works."

Lynda V. Mapes is a Seattle Times staff writer. Tom Reese is a Times staff photographer.

Copyright © 2005 The Seattle Times Company

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