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Picture two part-time workers. Let's call them Dick and Jane. Each works 25 hours a week at Costco. Dick stands just inside the front door making sure customers flash membership cards as they enter. Jane stands at her demo station cooking, promoting and serving samples to hungry customers. Dick and Jane work inside the very same Costco, have each managed to clock in 1,300 hours and were each hired exactly one year ago today.

So do Dick and Jane both enjoy Costco's legendary high pay and perks? Most folks would assume yes, but guess again. This year, Dick has earned $2,600 more than Jane. Upon eligibility, Costco will foot the bill for most of Dick's health insurance, including dental, vision and prescriptions. Dick receives paid holidays, vacations and sick days, a 401k retirement plan, a free life insurance policy, weekend differential pay, stock options, profit sharing and eligibility for yearly bonuses—a veritable cornucopia of goodies. Within four or five years, Dick can expect to earn Costco's average hourly wage of more than $17 a hour.

Then there's Jane. After her 1,300 hours spent shoveling out chicken nuggets and jellybeans, Jane takes home 20 percent less than Dick, a 401k option and a Costco holiday pie. With her one mandated 25 cent an hour raise each year (and never a penny more), Jane can expect to attain Costco's average hourly wage by the year 2040.

In-House Poor House

We've always been in favor of improved wages for workers. When you have a strong middle class, they want to buy more stuff at Costco.

—Jim Sinegal, Costco cofounder and CEO

While widely touted as America's most generous and progressive corporate retail employer, Costco nonetheless ensures that about 10 percent of its in-house workforce receives virtually none of its much-trumpeted compensation bounty. No one outside the industry seems to know it. Product demonstrators are poor cousins once removed from the rest of the Costco family. In fact, even when compared head-to-head with Costco's notoriously low-paying arch-rival, Wal-Mart's Sam's Club, Jane would do significantly better sampling for Sam's. Every family has skeletons in the closet, and this one has lurked in the shadows behind Costco's glowing press coverage for 20 years.

What accounts for the enormous disparity between Dick and Jane's remuneration package? Dick works for Costco, while Jane, who works at Costco, doesn't actually work for it. Instead, Jane works for either Warehouse Demo Services, based in Kirkland, Wash., or for its mirror-image counterpart, Club Demonstration Services, headquartered in San Diego. For the last two decades, Costco has contracted with these two independent companies to provide them with in-store product demonstrations. Each company was created to service Costco, and Costco alone. But to untangle why Costco pays its "Demo Dollies" even less than the bad boys from Bentonville requires a short rewind.

Caste System Biz Model

Virtually none of the sins of modern capitalism are at Costco.

—Costco board member and Warren Buffet business partner Charles Munger

Costco CEO Jim Sinegal cofounded the warehouse operation together with current chairman of the board Jeffrey Brotman in 1983. They entered an emerging market that would soon be dominated by another newcomer, the Wal-Mart-owned Sam's Club. But the first kid on the warehouse retail block was actually Sol Price and his Price Club, which started selling wholesale/retail seven years earlier.

By 1987, both Costco and Sam's Club had eclipsed Price Club outlets numerically, and the deep-pocketed Sam's was clearly pulling away from the pack. The writing was on the wall. Either Price Club and Costco would merge, or Sam's Club would gobble up one and leave the other out to dry. So 1993 brought an uneasy partial merger between Price Club and Costco.

Six years before this partial merger, Club Demonstration Services (CDS), a subsidiary of Daymon Worldwide Demos Company, was formed to provide sampling services for Price Club stores. Two years later, Costco struck a similar deal with Ken Chamberlin, one of its in-house brokers. Chamberlin's company would become Warehouse Demonstration Services (WDS). Following its partial merger with Price Club in 1993, Costco and its founders ultimately emerged to run the combined operation under the Costco moniker in 1997, retaining both CDS and WDS as its exclusive in-house vendor-demonstration services.

Warehouse Demonstration Services now employs 6,000 people in 160 Costco locations throughout the Northwest, the Bay Area, Los Angeles, Alaska and Hawaii; CDS staffs demonstrators in 225 Costco stores stretching across 32 states and Puerto Rico. Both provide their services exclusively to Costco, are permanently housed in and affixed to every single Costco nationwide—and offer equally anemic pay and benefit packages to their product demonstrators.

And just how close are these companies to Costco? Repeated calls over the course of two weeks were made to WDS corporate offices in Kirkland. I was told that in order to speak to company president Ted Coehn, the interview would first have to be cleared by Costco corporate management. When asked if WDS was not an independent company free to speak to whomever, the reply was, "Yes, but we work very, very closely with Costco."

The contractual arrangements each of the two demo companies signed with Costco are remarkably similar, if not identical. When asked about this, Andrea Morgan, CDS director of human resources, confirmed that "a lot of those things that are structured for WDS are structured the same for our company. With our contract with Costco, we're working with their corporate headquarters up at Issaquah [Wash]. So generally any contract conditions are going to be the same between WDS and CDS." All this makes perfect sense, but I had a nagging feeling there was more to it than that.

Demo Dudes & Dollies

We treat [in-store demonstrators] like family, of course. They're in all our buildings.

—Rohnert Park Costco general manager Dave Renz

With Costco corporate's eventual blessing granted, the opportunity to speak with WDS president and CEO Ted Coehn was at hand. I was curious about his perceptions concerning the general financial well-being of his demo operatives. Coehn responded, "Our experience is that the majority of our employees are people who are not supporting themselves or have to support a family on this income."

Specifically, Coehn said, "We have lots of retirees who have pensions and have Social Security, and this is a great way for them to get out of the house and get a little pocket money and buy their kids some Christmas presents. The majority of the people working for us are not people who are living in trailers or are one paycheck away from living on the streets."

But Coehn's slant doesn't match what I heard from a host of WDS product demonstrators, most of whom declined to be named for fear of recrimination. Take, for example, what David Gentner wrote in an email. Gentner's been a WDS "Demo Dude" at the Rohnert Park Costco for six years. According to Gentner, "Most [demonstrators] work less than 30 hours [a week] and clear eight-something dollars [an hour]. Most clear less than $1,000 a month." Gentner added, "With other costs, it is clear that most [demonstrators] are below poverty level and qualify for food stamps. I personally qualified for earned income credit for the first time, and it was not for a child or military service or illness, but because my income was just too low."

Another respondent described demo-folk economics this way: "We are poverty-level paid employees. Some of us have other jobs, but for others, this is it. I do childcare on the side, but it's not something I can count on."

Another worker said she'd been working inside Costco for the better part of 20 years. "I didn't intend to work that long," she admitted. "We got nothing. No overtime for working Sundays. No Christmas bonus. Nothing, nothing, nothing, nothing, nothing. A paycheck. That's it. That's all we get."

But the most damning comment came from a former WDS sampler in Novato, who said, "WDS often hires people who are already disadvantaged, and then exploits them—aging folks, recent immigrants and disabled. Why can't all workers share in the embrace of Costco's prosperity? People who have any choices won't put up with WDS."

Bullet-Proof in Bulk

We pay much better than Wal-Mart. That's not altruism. It's good business.

—Jim Sinegal

Costco is going gangbusters. While most other retailers sputter and slump, Costco's earnings jumped 12 percent from last year. Costco's earnings soared to double-digit gains in nine of the last 10 quarters. One reason for this is that Costco's customers tend to be more affluent than its rivals. The average Costco-member family income clocks in at $22,000 a year more than the nation's average. This means that Costco has been bulletproof in an economy that lost 80,000 jobs in March alone.

In fact, as economic conditions worsen, Costco, with its low-priced, high-quality merchandise, arguably becomes a more desirable place to shop in tough times than in flush times, when convenience shopping can trump price. The result is a constant boom. "They end up taking share in good times and in a weaker economy," says analyst David Schick of Stifel Nicolaus Financial Corp.

Costco could offer the financial muscle to ensure an arrangement with WDS and CDS that provides better wage/benefit packages for its daily in-house demonstrators. Sam's Club did it. But this is not to say there aren't those, especially on Wall Street, who would oppose such a move. One widely circulated quote has Bill Dreher, a retailing analyst for Deutsche Bank, complaining, "From the perspective of investors, Costco's benefits are overly generous. It's better to be an employee or a customer than a shareholder." Unless, that is, you happen to be Costco-based Demo Dolly.

Costco sets the high-water mark for employee considerations in our domestic retail universe. Progressives find it hard not to cheer on Costco CEO Jim Sinegal as he takes George Bush to task, lends his support to raising the minimum wage, champions universal healthcare or makes a journalist's day by providing spicy liberal business-mogul quotes. Sinegal insists on being paid no more than 10 times what his average in-house worker makes. Of course, Sinegal is a centimillionaire from Costco stock, but even us hairsplitters would expect that.

It's almost inconceivable that, with Costco's stated policy to nurture the middle class by example coupled with its financially sound and profitable business model, it is incapable of bettering the financial well-being of the thousands of Demo Dollies working beside well-paid employees each and every day. Who, if not Costco, exemplifies proof that a satisfied, well-paid workforce out-performs exploited drudges every time? Costco could insist that WDS and CDS conform to its employee-treatment standards. Or it could do what Sam's Club does and hire product demonstrators as employees. Costco simply chooses not to do so. How does it justify this inequity? Repeated interview requests to high-level Costco management over a course of several weeks recieved no response.

Extra Upside-Down Logic

We are a company that promotes 100 percent within the company.

—Jim Sinegal

Were they to hire on at Sam's Club, our Jane and Dick, performing the very same tasks they had at Costco, would get equal pay and benefits. Dick would take a massive financial hit, though, while Jane would have an array of previously unreachable benefits floated her way. Whereas Costco designed a two-tiered in-house worker caste system, divided and decidedly unequal, at least you can applaud Sam's Club for parity. Fact is, Costco's indie demo-firm contract strategy wouldn't surprise a soul had it been the big bad Bentonville banditos shaking down the workforce.

Costco is well known for and justifiably proud of its policy of advancing workers from within. But a Costco corporate manager who declined to be named told me that Costco has no policy favoring WDS employees who would like to improve their lot by working for the parent company. In fact, some have argued there is a contra effect, as the tendency would incline Costco not to "fish off the WDS dock."

Compared to Costco, everyone at Sam's, including part-time food demonstrators, is a legitimate employee, eligible for health insurance, stock options, store bonuses, paid vacation, sick and holiday time, a 10 percent discount on merchandise—and even a free Sam's Club membership card. This, however, is not the case at Costco.

"Costco has thousands of contractors and vendors," WDS' Coehn said. "They can't subsidize all the people that they work with. Their first priority has to be to take care of their own employees and take care of their members by providing a great shopping experience and great prices and great products."

But thousands of different venders don't work inside Costco stores each and every day; WDS and CDS do. It seems that Costco's choice was to deal away 10 percent of those working under its roof each day in order to save the additional expense, instead of making them bona fide employees like Sam's Club does. Instead, Costco chose to encourage "independent" companies to, in effect, subsidize Costco—on the backs of low-paid demonstrators.

So it appears that Coehn has it upside down. It's the Demo Dollies who are subsidizing Costco, providing their time and energy at less than the head-on competition pays for the same workforce Evidence would sugges a classic case of corporate hypocrisy and worker exploitation. Maybe Costco and, by extension, its two demo-firm partners have their heads in the clouds when it comes to this imbalance. But the fact remains: Costco purposely set up this inequitable, parallel hiring structure. Sam's did not.

Costco retains its lauded profile, while low-paying independent demo companies do the dirty work. That's a pretty sweet financial deal for Costco, but not for the Demo Dollies.

And besides, is this any way to treat family?

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