The Hindu Business Line : How not to value your employees

If employees at Circuit City are being looked at merely as an element of cost, and not as a human resource, at Tribune Co., they have been reduced to a prop of a financial juggler. Those who remain employed in the organisation after a lay-off that they feel was not justified, suffer from morale problems that really affect their work.

Circuit City, the second largest electronics goods retailer in the US, announced last week that it was laying off about 3400 sales employees in an effort to reduce costs and improve profitability. Nothing wrong with that, but the announcement was quite curious: The store was laying off its highest-paid retail sales employees. Here is a company that is in the retail sales business and the two steps that it has taken till now do not make much sense; it is closing stores and laying off retail employees.

Circuit City is clearly in a tough competition with Best Buy and is feeling the heat. It is losing out to its bigger and more successful rival. While Circuit City's revenue has increased about 4 per cent over the last five years, Best Buy has increased its sales by 15 per cent. Circuit City's profits fell about 12 in 2005 while Best Buy's increased by about 16 per cent. The management of Circuit City is under pressure to improve its performance and the scheme it is devising must be making Best Buy happier still.

Inexplicable moves

This is a time when the company needs all the help that it can get from its employees. It needs to improve same-store sales, expand its network of stores and do much better that it has been. It needs to cut costs too but the last place you would expect the management to touch would be the sales operations. But the accounting mentality that seems to have taken over the company makes it ready to sacrifice the core of its business competence for the sake of some short-term improvement in numbers that it can report to the investors.

The complexity of the electronics products means everyone needs some assistance in a buying situation. It is certainly true of me. Let's say I am buying a DVD player. I look around and am unable to understand all the so-called features, I am lost.

There is usually a young college-student- earning-pocket-money type who walks up and is able to tell me how to turn the demo model on and off. I ask him if I need extra cables or special adapters to connect it to my TV set, and he begins looking at the information on the side of the box so he can answer my question. I then ask him if it can operate on both 110 and 220 volts, and he starts to open the box to look at the manual inside. I fear I may be pushing him to the edge of his knowledge frontier.

I wonder whether I can ask him the next question I have — if it can play video CDs also apart from the DVDs. With some reluctance I pop the question, see the cloud cover spread across his face and he then says, `Excuse me' and goes off to get someone else.

The person he gets, the more senior, higher paid, full time, long term sales employee is the one who not only answers my questions, but goes on to compare it with a cheaper model on display and finally waves me off with the more expensive model, but happy, to the check-out counter. That is the kind of employee that the top management of Circuit City plans to lay-off to reduce costs.

The reason given for the choice of those who were laid-off was that they were `well-above' market rates for retail jobs. Companies often lay-off swaths of employees in order to cut costs or for various other reasons of efficiency and strategy. The reason given by Circuit City of wage rate compared to the `average' without any reference to productivity or effectiveness is unusual. The HR policies of Circuit City get more and more curious. The laid-off employees are to be allowed to re-apply for the same jobs. That is, those who are getting about $12-15 (Rs 540-675) per hour now can re-apply for the entry level $8 (Rs 360) per hour positions which the company wants to replace them with.

Morale problem

Now, you may wonder, why did they not just offer their employees the option of staying on the job at a lower pay. (A more sensible company would have cut everyone's salary if desperate about costs, but we are talking about minimum levels of sanity here.) Apparently, the company fears that allowing them to stay at a lower pay would have had serious morale issues. Now, had it only looked at the research studies that have examined this, the management would have found that the morale of the `survivors' is the more serious problem. That is, those who remain employed in the organisation after a lay-off has taken place, that they feel was not justified, suffer from great morale problems that really affect their work.

So, at a time of poor sales performance, the company wants new junior employees on its sales floor, not experienced people with superior product knowledge and who are interested in making a career in the company. On top of that, the company is going to ruin the morale of all their existing sales people.

As a sidebar, you may be interested to know that the Circuit City Chief Executive, Mr Philip Schoonover (who was previously employed at Best Buy) received a total compensation of $8.52 million (Rs 38.34 crore) in 2006, which included a salary of $975,000 (Rs 4.4 crore).

There is no indication if his compensation is to be cut. His predecessor, who left the previous year, gave up some of his long-term compensation when he quit in the face of the company's poor performance.

Employees at Circuit City are being looked upon merely as an element of cost and not as the `human resource' that can be leveraged for better performance. Employees are also taken for granted as an element of financial jugglery, as is turning out in the case of Mr. Sam Zell.

The Tribune story

The Tribune Co. is a media conglomerate that has fallen on hard times. The owner of such well known newspapers such as the Chicago Tribune and the Los Angeles Times, its financial performance has been sliding and the company was on the auction block for a while.

Now, it turns out that Mr Sam Zell, a real-estate magnate, has made an offer that the board of the Tribune has accepted.

The financial offer he has put together will take the company private and includes most of the stock being owned by the employees as part of an ESOP, or an Employee Stock Ownership Plan.

By putting in just $315 million (Rs 1,418 crore) of his own money, Mr Sam Zell gets control of an $8.2-billion (Rs 36,900-crore) company. From what I can make out, the employees were neither asked if this was all right , nor did they initiate the scheme to become owners of the company.

But by using an ESOP, Mr Zell can make the company take on a lot of debt that would then be used to pay off the existing owners, and the employees will be left holding the debt. Rather than being made to feel like owners, the employees provide the cover for financial jugglery.

In a company with a sliding performance, that is a formula for disaster, for the stage is quite likely in the future when the banks will require that the pension and other benefits of the employees, now owners, be cancelled to write-down or forgive some of the debt. Mr Zell and his attorneys, all good at real-estate, would have collected their returns and be long gone.

Clearly, neither Mr Schoonover nor Mr Zell think much of their employees. That's a pity in the way we have designed and run this capitalist system.

(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is cgopinat@suffolk.edu)

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