Tom O’B

Interesting article! But I don’t think lowering the wages is necessarily a bad idea for the company.

Previously employees at Circuit City were paid above market, or efficiency, wages. Voluntarily paying higher than average wages does have its benefits. First, higher wages attract a better pool of employee candidates. Second, it reduces employee turnover because less people leave for other equitable-position jobs at competing companies. Less turnover leads to a well-trained and experienced sales staff, and eventually more sales. Finally, higher wages gives employees the impression that the company cares about them, which fosters company loyalty and a greater willingness to perform to the best of their abilities while on the job.

These benefits were taken into account during Circuit City’s decision making process. The retailer realized that the general composition of its sales force would change due to the pay cuts. One major drawback is that the competency of its sales staff will decrease as its best employees leave for higher paying jobs, like you said. Also, the time and effort needed to train new employees will undoubtedly have a negative impact on sales in the near future. Because of these changes, “Circuit City is expecting to have consolidated net sales growth of 8% during fiscal 2007, down from the 9% to 10% originally forecast.” (Business Week, 2007) This means that the estimated effect of efficiency wages is between 1-2% of Circuit City’s net sales.

If the money saved via these lower wages is greater than taking this 1-2% hit then there is no reason these pay cuts should negatively effect the company’s profits, even with a less skilled sales staff.

Source URL: http://www.businessweek.com/investor/content/mar2007/pi20070328_712708.htm?chan=top+news_top+news+index_investing