Circuit City and the feedback loop
I came across news that Circuit City is getting rid of 3,400 highly paid workers in favor of cheaper ones. How interesting. I suppose if you’re going to have a bunch of people who don’t know anything about the products they’re selling, there is no reason to pay them well. Seriously, this sets me off on two different but related paths. First, there is the whole thing about skilled but expensive versus unskilled but cheap labor. I’m also interested in the Circuit City bosses’ suggestion that they need to bring their pay structure in line with the labor market.
Circuit City is in sort of a rare class of stores. Since the Internet became a mainstream phenomenon perhaps 12 years ago, whole segments of stores have disappeared. First it was the dedicated software stores. Then it was bookstores, then music stores. Through all of this, places like Circuit City have managed to stay around because the brick and mortar thing works for them somehow. These things they sell are seductive–they beg to be played with. But because this type of store was specialized, they had a natural advantage over everything stores. Even though they made their money off of upselling service plans, they brought in customers who were looking for some product knowledge.
Sadly, this particular chain seems to have really lost it. The last few times I’ve gone in with genuine questions, the sales people (the ones asking “do you have any questions”) have one of three responses: Look at the box, determine that the information they need is not on the box, and answer “I’m sorry, I’m not sure;” look at the box, determine that something closely resembling an answer is located within the information printed therein and answer the question with a pseudo-answer that I already knew (from looking at the box;) and finally look at the box and come up with a totally incorrect answer. Look, the first answer is totally acceptable as long as the product in question isn’t in a display. Answers two and three just ticked me off. Based on my very last visit to Circuit City, I’m swearing off electronic devices (now that I have money, material things no longer interest me.) But if I were to buy another gadget, I’d probably drive across town rather than go back to the local Circuit City. So in a sense, they could hardly do much worse with lower paid, lower skilled sales staff. Still, my thinking is that it’s the management that is overpaid.
You see a lot of this message recently, that there is a growing gap between the well-compensated and the not well-compensated. Is it happening? Who am I to say. But I could easily see one simple mechanism by which that could happen: the annual raise. I’m a young guy and I’ve worked for one company for all of my serious post-college life. We get annual raises; a portion is virtually guaranteed but it is somewhat merit-based as well. My understanding is that from year to year, the average increase is in the 3.5-5% range. So if you stay put, you keep up with the cost of living and then some, or at least, that’s the idea.
But wait a minute. Because a 5% raise for someone making $30,000 is going to be less than that for someone making $50,000. And if you take that difference across several years, it becomes huge. In this case, a $20,000 per year difference in the first year becomes a $26,000 difference over five years. Someone who makes $120,000 in the first year could be making $33,000 more than that after five years while the person who stared at $30,000 isn’t making much more than that in the first place. The gap is widening.
But the focus on how much a job is worth is so deeply ingrained in how companies make offers, it may have an even more nefarious effect. Companies share data on salaries, so they all know what a person in a given position should make. Since these averages are going up, and they’re going up in much the same fashion as salaries themselves (in other words, increasing percent-wise,) the gap is growing not just between person A in one job and person B but also between everyone in person A’s field and everyone in person B’s field. So now the entry level accounting clerk and the entry level management trainee are starting off with an artificially wide gap before they even earn their first paycheck.
I’d be very interested to see if there is data to back this theory up. If there is, my guess is that people, especially at the top, are not being paid based on market forces so much as by a self-actualizing system that doesn’t serve the people at either end particularly well. People at the top of the market risk losing their jobs to more reasonably priced off-shore labor while people at the bottom find themselves increasing less able to keep up with the housing market let along the Jones.
How does this tie back to Circuit City? Well, their spokesman Jim Babb made an interesting comment. He stated that “all companies at one time or another need to go through and make sure their cost structure works with market conditions.” This makes me wonder if Circuit City inadvertently increased their employees wages but just enough to, over time, knock them out of whack with the rest of the “market” severely enough to justify this mass layoff. Correcting in this way would be akin to a feedback loop on a stereo. Pay poor people less, pay rich people more and you are bound to destabilize the system.
