Circuit City Stores Inc. has a message for some of its best-paid employees: Work for less or work somewhere else.
The electronics retailer on Wednesday laid off 3,400 people who earned “well above” the local market rate for the sort of jobs they held at its stores.
In 11 weeks they’ll be able to apply for their old positions -- which will come with lower hourly wages.
The move put Richmond, Va.-based Circuit City, which has more than 40,000 employees in the United States, at the forefront of a new way of controlling labor costs in the service industry. Employers determine the prevailing market wages for particular jobs in various geographic regions and then find ways to make sure that their workers’ salaries stay within that range.
Wal-Mart Stores Inc., for example, last summer capped the pay of its veterans at levels consistent with competitors’ top wages. Wal-Mart didn’t lay off those who earned above a certain amount but did stop giving them raises, saying that would encourage them to advance through the ranks to higher-paying positions.
Circuit City is being more aggressive about it, said Peter Doeringer, a professor of labor economics at Boston University. “What’s unusual is to say we’re doing this deliberate swapping of high for low.”
Company spokesman Bill Cimino said Circuit City wanted to be honest with its sales associates so they would understand the reason for the layoffs.
“It had nothing to do with their skills or whether they were a good worker or not,” Cimino said. “It was a function of their salary relative to the market.”
Circuit City expects to reap $110 million in savings in the next year, partly as a result of the layoffs and other changes announced Wednesday, including the outsourcing of about 130 information technology jobs to IBM Corp.
The company’s stock rose 31 cents to $19.23. Circuit City shares have fallen 21% over the last 12 months.
ot everyone on Wall Street is sure the layoffs will pay off.
The highest-paid employees can be some of the best and most experienced, and if Circuit City’s customer service suffers, so may the company’s fortunes against Best Buy Inc., whose reputation for high-quality help has helped make it the industry leader.
“I question whether Circuit City’s move is going to do them any good at all,” said Van Baker, a media and consumer electronics analyst with Gartner Inc. in San Jose. “One of the things they’re doing is getting cheaper employees who are likely to be not as well equipped to address consumer questions.”
Warren Bennis, who teaches leadership at the USC Marshall School of Business, agreed, calling the move “demeaning and counterproductive.”
Circuit City’s Cimino said that higher-paid employees weren’t necessarily the most productive. He also noted that only 8% of the workforce was affected.
Among those who lost their jobs Wednesday were 321 people who worked in the Los Angeles area’s 44 stores. A total of 621 workers at 90 stores in California were laid off.
Circuit City wouldn’t give details about what it paid its nonunion workforce or the prevailing market rates, noting that they widely vary across the country.
Analyst Richard Weinhart with BMO Capital Markets in New York estimated that people who work in consumer electronics stores earned $8 to $13 an hour.
The company said it expected “greater sales volatility” during the first half of the fiscal year partly because of the layoffs.
In a note to clients, Goldman Sachs analyst Matthew Fassler said that after Circuit City’s last major pay change in 2003, when it went from commission-based pay to flat hourly rates, Best Buy’s sales in stores open at least a year gained significantly while Circuit City’s fell.
On Wednesday, customers walking by a Circuit City store in Santa Monica with a “Now Hiring” sign in the window expressed dismay.
“To me it’s a slap in the face,” said Kenrich Nyvett, a parking lot manager in Santa Monica who went to Circuit City for DVDs.
“I don’t feel like it’s something good,” the 46-year-old Los Angeles resident said. But “everybody needs a job these days.”