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Wednesday, April 11, 2007

Circuit City's Mistake

By now, I'm sure you've all heard Circuit City's plan to layoff highly paid workers and replace them with lower paid people. They are getting a great deal of bad press for this--as they should.

But their reason for getting bad press is all wrong. Layoffs are rarely nice to the employee. (I did have one lady jump up and down for joy when told she was getting a package. She had to be stopped from running gleefully down the hall, as others were not as excited as she.) Nevertheless, they are part of a free market economy and can ultimately make sense for business.

But, this isn't about cutting a bloated workforce. It's about cutting an overpaid workforce.

Eve Tahmincioglu at MSN writes:
How they ended up earning the above-market wages is a puzzler, because Circuit City’s managers presumably approved the pay levels.

I asked Babb if store managers were just too generous in compensating their workers, and after a long pause he said: “I’ll let you draw your own conclusions.”

I'm going to make an educated guess here. (For the record, I worked in retail HR for a while. Part of my job was to analyze the pay and benefits of our competitors to make sure we were paying more.) I bet they give standard raises on a schedule. Starting wage is X, at six months you get X+$0.50, at a year you get another raise. A lot of retail stores run increases on their hourly workforce like this.

Why? Because turnover is high and they are trying to lower turnover by giving you a reason to stay. Managers are probably dinged by high turnover and the employees know that if they slog through for another 6 months they'll get another raise. If they defect to the competitor, they'll have to start back at the bottom of the pay scale.

It works, to some extent. But here is where the problem lies; longevity is being rewarded, not increased value to the company.

If you know you will get an increase just by showing up for the next 180 days, why should you gain any additional knowledge? Likewise, a store manager knows that everyone gets the same raise, so why should he devote his time to training and developing?

This is Evil HR Lady's rule for retail: If your "highly paid" hourly workers do not bring more value to your company than your "lowly paid" hourly workers, the problem is with management, training, and compensation structures.

Okay, it's not the type of rule you'll seen done up in counted cross stitch in someone's office. But the problem isn't with the workers. Why does your compensation structure allow for increases for someone who has not provided increased value? What motivation does the employee have when they are not paid or promoted based on their results, only their longevity? Why have you not trained and educated your workforce so that the longer they are there, the more knowledge they have? The average salesperson with 5 years of experience should be able to far outsell the newbie.

Every time I've been in Circuit City, the sales person has been young and geeky. Those young and geeky types are there to gain experience and to help pay for college. The pay structure doesn't induce them to stay--they know they'll make more money elsewhere. The people who do stay are the ones who know they won't make more money elsewhere. Therefore, the perverse problem of paying for longevity is that it promotes the Peter Principle.

I'm a fan of Paying for Performance. Yes, I know that requires more work on management's part. But, shouldn't management's responsibility be to the company and not to their own laziness? The truth is, if you paid for performance, you'd have a better performing work force and managers could have time to develop and evaluate rather than solving customer complaints.

14 comments:

Travis A. Sinquefield said...

I agree that it is an issue with management. It is their fault that the workers are overpaid, and it is sad to see the workers pay for it because, in the end, they did nothing wrong. They were just a victim of bad management and a poorly designed compensation system.

Travis

Anonymous said...

Circuit City also had a significant number of legacy sales staff that had formerly worked for salary plus commission. When Circuit City did away with commissioned sales, they adjusted employees' hourly rates to compensate them for the lost commissions.

Tim Lacy said...

Evil HR Lady,

You should get consultant's fee from Circuit City for this entry. Why? You've caused me to do something I couldn't heretofore do: empathize a little bit with Circuit City's management.

TL

Wally Bock said...

Anonymous is right about the legacy sales staff being moved to salary and now making up a significant portion of the laid off contingent. The original idea was to mimic Best Buy. My sources say that CC did not do a good or selective job of making that transition and have now decided to (parodying Frost) blow it all to smithereens and have it all made over new.

Evil HR Lady said...

That the "overpaid" workforce used to be commission tells me that their commission structure was wrong as well.

They've definitely had compensation issues for a long time.

Anonymous said...

Circuit city will probably lose business over this as well.

Anonymous said...

Great post!!

A major piece missing from the recent coverage of the layoffs at Circuit City is that this is not the first time that they have completed a “wage management initiative” – an interesting choice of doublespeak directly taken from their March 28, 2007 press release.

In fact, the electronics retailer unveiled and implemented a similar cost cutting move at least once before, as reported in the February 6, 2003 edition of The Wall Street Journal. The firm announced then that 3,900 commissioned sales staff were being retro-recruited and replaced with less expensive newbies. Lackluster financial performance – and a need for a revamped sales strategy – were provided as official explanations.

Circuit City’s most recent staffing lobotomy signals the presence of more systemic and chronic performance issues that layoffs alone will not cure. The firm’s press release underscores their need to reduce SG&A expenses, and to eliminate non-value added work, laudatory goals, but it has seemingly “made the same mistake twice,” and may be caught in a downward, inescapable vortex.

Other bloggers, and the popular press, including the New York Times, have thoroughly detailed the employee relations fall-out that can be expected, which are certainly obvious and need no further chronicling. What has not received enough attention however, is the long trail of research, such as that undertaken by Kim Cameron of the University of Michigan, and Wayne Cascio of the University of Colorado, that convincingly calls into question the long term effectiveness of workforce management strategies that rely heavily or exclusively on labor cost reduction as a transformational strategy. The odds for improved business performance increase significantly only when cost reduction and improvement touch all elements of the business, not just the workforce. Maybe Circuit City will employ that thinking going forward.

robert edward cenek, RODP
www.cenekreport.com
Uncommon Commentary on the World of Work

Rowan Manahan said...

I would love to have sat in on the meeting that produced this slipshod, lazy-ass solution to the compensation problem.

"OK folks, let's wrap this one up quickly shall we? How about if we install a civil service compensation system? That should keep everyone happy."

"Couldn't we end up with a bloated, overly expensive, non-producing workforce after some time has passed?"

"It's possible, I suppose. But we can always dump a bunch of them if that happens. Look, can we take a vote on this? I propose the civil service approach; if we don't go with that, we're going to have to stay and discuss this for aaaaaaages - and I have a golf game this afternoon. Show of hands?"

Evil HR Lady said...

Robert--thanks for the insight and info. That's one messed up company.

Rowan--I'm sure that's exactly how that meeting went. What were these people thinking?

And it all goes to show that numerous years of bad management can't be fixed easily or quickly.

class factotum said...

Ah, but the CEO is often compensated on short-term results, so that's what he's working toward. Yes, I absolutely believe in pay for performance, but that should go all the way up the ladder. A CEO should not get a $1.2 million bonus when he has laid off 1,000 salaried employees and the stock price has tumbled 35% in three months.

Not that I'm bitter or anything.

Charles said...

I am a former employee of CC and was laid off back on March. While my situation may be differnt than others, but I was a top sales in the store fo rmy depatrment and top 10 in the region. From the time I started to work at CC to the time I left sales had increased every month, why? Beacuse customers were refering their friends to us because we were friendly and knowledgeable about (my department Firedog) computers. Since being laidoff I have started my own business and making mutch more money. So there "being paid above market value" for me was complete B.S.

Anonymous said...

Actually, Circuit City doesn't give fixed raises. You have to perform well to get any raise and perform exceptionally well to get a higher raise. If you did your job properly you got a .25 raise. If you did better than that, .35. If you were phenomenal, .50. So in a way, employees did have incentive to work harder and better. The problem lies with management... and the fact that they suck and make retarded decisions, from the department managers on up to the CEO.

Sharlotte said...

I found your blog very interesting. You are talking here about Circuit City. I have found out everything about the company from http://www.pissedconsumer.com. Besides, I read consumer reports on the products and services of the company. I must say – very few positive reviews. Most people are not satisfied with the Circuit City, however it is one of the largest consumer electronics retailers in the United States.

Don Eames said...

Please read my free eBook called "CIRCUIT CITY SIX - Six Fatal Mistakes of a Once "Good to Great" Company. It can be downloaded at this link: http://www.eamesmgmt.com/CIRCUIT_CITY_SIX_eBook.shtml.

Sincerely
Don Eames
Former Senior Vice President of Best Buy