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Circuit City Ends Commissions, Cuts Jobs

2/10/2003 02:00:00 AM Eastern

In a dramatic effort to reduce costs, Circuit City has moved its sales force from a commissioned to an hourly pay structure, will pink-slip about 4,100 employees (3,900 being commissioned salespeople), or nearly 10 percent of its workforce, and will shut 10 more product repair centers.

The No. 2 CE chain said the switch to a single hourly pay rate, effective this month, would reduce earnings by about $40 million due to severance, sales disruptions and other one-time charges. But dropping the split pay system, which chairman/president/CEO Alan McCollough described as divisive, cumbersome and expensive to administer, is expected to save the company some $130 million in payroll costs this year.

In an unusual move that underscored the shift in corporate culture, the chain delayed the openings of its 626 stores on Feb. 5, the day of the announcement, in order to inform its workforce of the changes.

Indeed, the decision to restructure salaries was significant for Circuit City, which had long embraced its commissioned sales force as a key point of differentiation between it and chief rival Best Buy. But according to McCollough, the impact on service will be minimal, thanks to greater grab-and-go merchandising, increased online research by consumers, and an effective Internet-based training and accreditation program for its sales associates.

"The ability of people to sell is not based on how they're paid," McCollough said. "If you have good people and set the expectations, they can do the right job. It's more about expectation than compensation."

Even attachment rates of extended warranties — typically a sales-intensive, incentive-based category — will remain unaffected by the new pay structure, McCollough predicted, as selling contracts is "part of the job requirement."

Currently 60 percent of Circuit City's sales force works on commission, generally within the core audio, video, computer and mobile departments, while the balance serve as cashiers or in housekeeping roles. About 3,900 commissioned staffers will be terminated while 2,100 new hourly workers will be hired, bringing the net loss of sales jobs to 1,800, or an average of three per store. McCollough said that a "majority" of the commissioned sales force will stay on as hourly employees at salaries that would be comparable to their prior compensation.

The chain will also add a third sales manager to about 400 stores, ostensibly to support the audio and video departments, but will dismiss 200 repair center workers as it closes an additional 10 service centers. Circuit City has already cut the number of repair centers from 37 to 17 over the past four years, as falling prices and enhanced features have made consumers more inclined to replace broken products rather than fix them.

Industry observers interpreted the salary shift as a concession to Best Buy's tighter cost structure, and lamented Circuit City's abdication of a core operational tenet. "It's a major blunder," said Warren Mann, executive director of the MARTA Cooperative of America buying group and a former Circuit City supplier while on the manufacturing side of the business. "They've gone to the dark side of retail, with a clerk floor like Kmart. You can't make money selling better goods in a self-sale environment."

Mann sees the layoffs as an opportunity for service-oriented dealers to "pick up good sales people. They're hard to find and keep, and Circuit City is just throwing them away, like they did with appliances."

Elsewhere, Circuit City said it will spend about $150 million this year to remodel and relocate stores. Approximately 200 units will be retrofitted with standardized, flexible store fixtures that will put more merchandise on the sales floor and permit quick configuration changes as new products and technologies are introduced. The company also plans to relocate upward of 22 older stores, completely remodel five units and open eight new locations this year.