Case 11-1
Summary
Costco, the nation’s largest wholesale club operator, serves more than 71 million members in 44 U.S.
States and additional countries. About 3,700 products are offered of all different genres in addition to
products and services. Costco looks for ambitious, energetic employees who are service oriented with
integrity. They offer excellent benefits and pay a larger percentage of premiums than most other retailers
do.
Analysis
This case relies on instructors and students to refer to Box 11.5, which lists the additional benefits given
to Costco employees who are eligible for benefits. Instructors may wish to discuss the competitive
strategies in providing top-notch benefits, and what the impact could be on revenue, expenses, and
employee satisfaction.
Questions
1. What organizational processes does compensation affect and what is Costco’s rationale for having an
exceptional compensation plan?
Compensation affects employee recruitment, retention, and job satisfaction. Costco’s rationale for “great
2. What are the parts of a compensation system and what component(s) does Costco’s compensation
system focus upon?
A compensation system includes anything that an employee may value and desire and that the employer is
kind payments) as well as noncompensation components (no direct compensation—i.e., company
3. What are the four basic types of compensation and which are evident at Costco?
The four basic parts of any compensation system include base pay (basic wage), wage/salary add-ons
4. What is expectancy theory and how does or does not Costco employ this theory within their
compensations system?
Expectancy theory proposes that employees are motivated when they believe that they can accomplish a
5. What are the differing types of basic wage classifications and how does Costco categorize their
workforce by basic wage?
Basic pay is broken down into two main categories: wages (paid on an hourly basis and usually permitted
6. What is Costco’s philosophy about employee compensation?
Organizational philosophy about compensation revolves around a firm’s ability to pay, the type of
compensation, paying for performance versus longevity, skill or competency-based pay, at/below/above
7. Costco lists numerous benefits that the firm provides employees above their basic salary. What
pay rate and benefits must Costco provide their employees as required by Federal Labor Laws?
The Fair Labor Standards Act requires that all firms pay a minimum hourly wage and that
Case 11-2
Summary
CVS Caremark is the second-largest drugstore chain in the United States and used to be the industry
leader. Now, second behind only Walmart, CVS’s goal is to increase stakeholder profitability and once
again become the industry leader. CVS decided to increase profits by cutting operational costs, by
adjusting employee pay raises, and putting a ceiling on salaries, making the highest earning employees
ineligible for a raise.
Analysis
This case study shows the divide between the compensation between top-level executives and store-level
employees. Top-level executives were immune from a policy that prohibited store employees from
receiving raises, based on a redline system where the store employees who had remained loyal to the
company and had maximized their hourly salary were ineligible for future raises. This created an
uncomfortable working environment for the most senior store employees who were receiving
compensation above the national average for store employees.
Questions
1. Describe the pay structure and compensation system for a CVS store employee. How might this pay
structure be different from the CVS CEO of the firm?
In order to keep the cost of labor minimum, CVS pays minimum wage to the employees at the bottom of
the organizational hierarchy. Due to state laws and regulations, this rate depends on the location of the
2. Define the rate range of CVS employees. How would you change the pay structure to encourage
performance, especially for redlined employees?
At the bottom of the job hierarchy, CVS employees are paid the minimum wage but until the wages reach
the market average, CVS is generous about providing raises. Once the wages pass the market average,
they are redlined and there is no chance to receive raise or bonuses. So rate range starts with the minimum
3. In terms of expectancy and equity theories, describe how the redline policy will affect the motivation
of employees.
The redline policy is advantageous for the new members of the organization as they can receive annual
raises as long as they perform well. However, the story is different for the redlined employees because
their chance of getting a raise does not depend on their performance; they simply will not get any! In
4. In light of the redline policy, what was CVS’s philosophy toward employee performance,
compensation, and longevity?
As the redline policy has been initiated, CVS’s compensation philosophy is now aimed to pay for
performance. Disregarding the advantages of having loyal employees, in order to cut the costs, CVS
5. Knowing that you have to reduce costs as CEO and balance employee wages, what other measures
you could take besides freezing raises for the highest paid employees?
There are three major strategies that can be followed in order to reduce costs and balance employee
wages. First one is layoffs. Low-performing employees could be detected through performance appraisals
6. Why would the firm implement an HR policy that they knew would negatively affect their highest
paid employees? Did they perhaps have a hidden agenda?
To cut costs, CVS executives could have chosen the option of providing a chance for early retirement for
its senior employees. Offering a satisfying severance package and letting them go, they could have
avoided the redlining policy and made both sides happier. However, this option was going to be highly