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.