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Post Leadership
Posted at 11:51 AM ET, 09/02/2011

The Costco king checks out


Longtime Costco CEO Jim Sinegal announced he will retire from the warehouse giant as of Jan. 1, 2012. (Paul Sakuma - AP)
More than a week after Steve Jobs announced he would be stepping down from the helm of Apple, the accolades are still rolling in. As they should: There are few longtime CEOs more known for buzz-generating marketing skills, more influential on the world’s culture and lifestyle, or more brilliant at designing must-have gadgets.

Still, it’s worth pausing amid the plaudits and praises to consider another longtime CEO and founder who announced his retirement during the past few days. On Wednesday, Costco’s chief executive, Jim Sinegal, said he would be stepping down from the chief executive job at the warehouse club on Jan. 1, 2012. When he does, Corporate America will lose a leader of a very different sort. It’s hard to imagine anyone with less pretense, more discipline or more integrity leading a major corporation today.

Sinegal founded Costco with Jeff Brotman, the company’s chairman, in 1983 and expanded it in the 1990s when his company combined with Price Club, which was owned by Sol Price — who pioneered the warehouse concept and had been a mentor to Sinegal. From those beginnings, he’s created a warehouse behemoth that pulled in $76 billion in revenues in 2010. Despite the poor economy, customers kept paying the $50 to $100 annual fees for the privilege of shopping at Costco: 87 percent renewed their memberships in 2010. He laid no one off during the recession, other than short-term staff for holidays and store openings. 

And yet, he has none of the trappings of success. Sinegal, who no doubt has become wealthy through Costco, makes about a third the pay of an average CEO. His salary is $350,000 a year, a fraction of the $1 million that’s common for most Fortune 100 CEOs. And his total take-home pay amounted to about $3.5 million in 2010 — a nice sum, to be sure, but again, far smaller than the median $9.3 million.

It’s not just his pay that lacks showiness; the way Sinegal works is lacking in pretense, too. His office is a tiny alcove without a door; the furnishings are literally as fancy as folding chairs. When a reporter comes to visit the headquarters at the company, which does not have any public relations handlers on staff — a true rarity in big corporations — Sinegal comes out to the reception desk himself. He even answers his own phone (“Sinegal!”).

He could probably charge more for the goods in his store than he does. But Sinegal holds fast to a mantra that nothing in the warehouse should be marked up more than 14 to 15 percent from cost. Even if the market would bear more, Sinegal believes pricing goods higher would prompt customers to lose trust. His discipline is legendary. “People have always asked historically, who’s your toughest competitor?” the company’s chief financial officer, Richard Galanti, told me back in 2008. “And I say it’s Jim.”

That disciplined approach to pricing hasn’t won many praises from Wall Street analysts. Neither has Costco’s wage and benefit policies, which are so generous that one analyst complained that "it's better to be an employee or a customer than a shareholder” at Costco. (It’s not now: Net income rose 10 percent in 2010 from the year prior, admittedly an off year during the recession, while Costco’s stock is up 40 percent over the last year.)

It’s not just that Sinegal is generous with his employees; he also leads with an integrity that few CEOs can rival. Consider this story Galanti told me in 2008. Back in 2003, Costco, which hadn’t raised its health care premiums to employees for nine years, said it was going to miss its earnings estimate due to rising costs, part of those being healthcare. For several years, Galanti and the company’s head of human resources had been pestering Sinegal about raising premiums, but Sinegal was adamantly against it. Finally, Sinegal agreed, but he wanted to keep it simple, with no fancy formulas for determining premiums and no glossy brochures to explain the increase. Instead, he would write a letter, in which he promised employees they wouldn’t pay more than 10 percent of the overall cost.

Fast forward a few years, Galanti told me at the time, and “lo and behold, with the changes, with all the actuarial estimates, with all the things like employees [making] smarter purchases,” employees were paying a little more than the 10 percent. Most CEOs, of course, would have welcomed the cost savings, pocketing the difference and staying mum about something most employees would never have known. But upon hearing this, Galanti told me, Sinegal wanted to pay employees back. To do so, he gave each employee an added bit of stock in their 401(k)s in 2008.

From what I’ve seen, Sinegal has instilled these sensibilities in his executives, most of whom have worked with him for decades — yet another rarity in large corporations today. That includes President and Chief Operating Officer Craig Jelinek, who has been named as Sinegal’s successor. I doubt much will change when Sinegal retires.

But he will be missed. Leaders with Steve Jobs’ brilliance and flourish and flash may get all the accolades when they move on. But those with Sinegal’s lack of pretense, principled discipline and steadfast integrity are just as rare. And they should be just as celebrated.

More from On Leadership:

Paul O’Neill: Only the president can restart America’s engine

Michael Useem: Revising investor capitalism’s mantra

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By  |  11:51 AM ET, 09/02/2011

 
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