You get what you pay for
Knee-jerk reactions are almost always wrong. Circuit City, the Richmond, Va.-based electronics giant, did a doozy of an HR knee-jerk reaction when, faced with a loss in the first quarter, it decided to get rid of all of its “high-paid workers.”
At the end of March, the retailer turfed 3,400 employees in the U.S. and Canada because it thought they were overpaid and announced plans to replace them with cheaper workers. Betty Owen, 56, of El Paso, Texas, was one of them. Owen, a part-time worker logging full-time hours, was pulling in $10.10 per hour (all figures U.S.).
According to published reports, the company decided to get rid of workers whose wage level was at least 51 cents above Circuit City’s “established pay rates.”
From a dollars and cents perspective, the move seems to make sense. Take 3,400 workers, assuming they work 40 hours per week, slash their wages by the lowest amount (51 cents) and the company will save at least $3.6 million every year in labour costs. That’s not small change.
Or is it? Considering Circuit City had 42,000 workers and $11.6 billion in revenue in 2006 and net income of $162.5 million, $3.6 million doesn’t seem like much. And from a public relations standpoint, it’s a disaster.
The announcement was met with calls to boycott the store and at least one lawsuit. Three employees in California have filed an age discrimination suit they’re trying to have certified as a class-action lawsuit. Fighting that battle alone could dissolve the savings from the wage cuts.
The repercussions are bound to echo beyond bad PR. Most of the workers being let go have been on the job awhile, and their experience is walking out the door with them. Training costs will increase and customer service will undoubtedly suffer.
And exactly what kind of workers are going to be filling these roles? When it made the very public announcements about wage cuts and terminations, Circuit City might as well have hung a sign on all its stores stating that, “good, talented workers need not apply.”
But that’s the new reality in retail, right? The Wal-Martization of the business means retailers have to keep wages low to stay competitive and there’s no room for good HR practices, right? Wrong.
A little outfit called Costco is punching all kinds of holes in that thinking. The Issaquah, Wash.-based warehouse club pays its workers generously. By some reports, they start at about $10 per hour and their earnings rise to about $44,000 per year after four years. They also get a strong benefits package. The result is low turnover and a very loyal staff.
In 2004, BusinessWeek decided to put Costco’s labour practices to the test. It compared Costco to Sam’s Club, the membership warehouse operated by Wal-Mart. It found that “by compensating employees generously to motivate and retain good workers… Costco actually keeps its labour costs lower than Wal-Mart’s as a percentage of sales.” Costco pulled in $13,647 in operating profit per hourly employee versus $11,039 at Sam’s Club.
Jim Sinegal, Costco’s CEO and founder, has resisted pressure from investors to cut costs, shrugging off comments that it’s better to be an employee at Costco than a shareholder.
“We think it’s good business. In the final analysis, you get what you pay for. Better employees mean higher productivity. We’ve proven that with our business model. We want to turn our inventory faster than our people,” he said. “(Paying low wages) doesn’t keep employees happy. It keeps them looking for other jobs. Plus managers spend all their time hiring replacements rather than running your business.”
The lesson? Better paid employees are more productive and happy, and that translates into a healthy bottom line. That’s an idea that seems to be lost on Circuit City.
At the end of March, the retailer turfed 3,400 employees in the U.S. and Canada because it thought they were overpaid and announced plans to replace them with cheaper workers. Betty Owen, 56, of El Paso, Texas, was one of them. Owen, a part-time worker logging full-time hours, was pulling in $10.10 per hour (all figures U.S.).
According to published reports, the company decided to get rid of workers whose wage level was at least 51 cents above Circuit City’s “established pay rates.”
From a dollars and cents perspective, the move seems to make sense. Take 3,400 workers, assuming they work 40 hours per week, slash their wages by the lowest amount (51 cents) and the company will save at least $3.6 million every year in labour costs. That’s not small change.
Or is it? Considering Circuit City had 42,000 workers and $11.6 billion in revenue in 2006 and net income of $162.5 million, $3.6 million doesn’t seem like much. And from a public relations standpoint, it’s a disaster.
The announcement was met with calls to boycott the store and at least one lawsuit. Three employees in California have filed an age discrimination suit they’re trying to have certified as a class-action lawsuit. Fighting that battle alone could dissolve the savings from the wage cuts.
The repercussions are bound to echo beyond bad PR. Most of the workers being let go have been on the job awhile, and their experience is walking out the door with them. Training costs will increase and customer service will undoubtedly suffer.
And exactly what kind of workers are going to be filling these roles? When it made the very public announcements about wage cuts and terminations, Circuit City might as well have hung a sign on all its stores stating that, “good, talented workers need not apply.”
But that’s the new reality in retail, right? The Wal-Martization of the business means retailers have to keep wages low to stay competitive and there’s no room for good HR practices, right? Wrong.
A little outfit called Costco is punching all kinds of holes in that thinking. The Issaquah, Wash.-based warehouse club pays its workers generously. By some reports, they start at about $10 per hour and their earnings rise to about $44,000 per year after four years. They also get a strong benefits package. The result is low turnover and a very loyal staff.
In 2004, BusinessWeek decided to put Costco’s labour practices to the test. It compared Costco to Sam’s Club, the membership warehouse operated by Wal-Mart. It found that “by compensating employees generously to motivate and retain good workers… Costco actually keeps its labour costs lower than Wal-Mart’s as a percentage of sales.” Costco pulled in $13,647 in operating profit per hourly employee versus $11,039 at Sam’s Club.
Jim Sinegal, Costco’s CEO and founder, has resisted pressure from investors to cut costs, shrugging off comments that it’s better to be an employee at Costco than a shareholder.
“We think it’s good business. In the final analysis, you get what you pay for. Better employees mean higher productivity. We’ve proven that with our business model. We want to turn our inventory faster than our people,” he said. “(Paying low wages) doesn’t keep employees happy. It keeps them looking for other jobs. Plus managers spend all their time hiring replacements rather than running your business.”
The lesson? Better paid employees are more productive and happy, and that translates into a healthy bottom line. That’s an idea that seems to be lost on Circuit City.
