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In a move some industry analysts characterized as "an uncertain experiment that could backfire," Circuit City Stores, Inc, the nation's second-largest electronics retailer, laid off 3400 employees, about 8% of the company's workforce, on March 28 because they earned too much money. Company spokesperson Bill Cimino told Bloomberg.com that the jobs that were eliminated were paying "well above" market rates, adding that the fired employees can re-apply for their jobs at lower pay after a 10-week delay. Cimino declined to give the wages of either the fired employees or the wages being given to new hires. He said it would vary "depending on the market."

A Circuit City spokesperson described the move as a "wage management initiative," telling MSNBC.com, "All companies at one time or another need to go through and make sure their cost structure works with market conditions."

Philip Schoonover, Circuit City's CEO said, "We are taking a number of aggressive actions to improve our cost and expense structure, which will better position us for improved and sustainable returns in today's marketplace." Schoonover received a 2006 compensation package of $8.5 million, including his salary of $975,000. Just for comparison, BestBuy, the largest electronics retailer in the US, paid its CEO, Brad Anderson, a compensation package in 2006 of $3.85 million, including his $1.17 million salary.

The company also eliminated 130 IT jobs (actually, it only cut 80 jobs, moving the other 50 employees to IBM), agreeing to outsource technical support to IBM in a seven-year $775 million contract, which represents a 16% savings.

On the same day it announced the layoffs, Circuit City lowered its revenue guidance for 2007 for the second time, from 9–10% to 8%. Domestic comparable-store sales are now expected to rise 6% instead of 7%. The company has hired Goldman Sachs to explore strategies for its Canadian InterTan, Inc. retail stores, including a potential sell-off.

Circuit City employs approximately 40,000 full and part-time employees in the US and Canada. The 3400 laid-off employees will receive severance packages. The company plans to replace those workers "as soon as store directors are able." New hires will not need sales experience.

The LA-based DailyNews.com interviewed Richard O'Neal, erstwhile salesperson at the Woodland Hills Circuit City. O'Neal had been making $15/hour, but was called in to a mandatory meeting on March 28, where he and other employees being laid off were given a memo that said the company had "made a business decision, with respect to certain positions, to separate from employment hourly associates whose pay rate is 51 cents or more above [an] established pay range." O'Neal said he was told that he could re-apply for his old job, after 10 weeks, "for minimum wage." Circuit City's Jim Babb denied this, saying the wages would be "above minimum wage," but would not give a range.

Industry analysts were mixed on the move. Sanford Bernstein & Co.'s Colin McGranahan said, "Firing 3400 of arguably the most successful sales people in the company could prove terrible for morale." A long-memoried, highly placed, unnamed audio industry executive (Stereophile's own "Deep Throat") concurs: "Circuit City did something similar five years ago, when they changed from a commission plan to a straight hourly wage, which meant that the most productive salespeople made less money and all of the dead weight could be even lazier than they had been. They lost almost all of their good salespeople, who were snatched up by other companies like Tweeter —and the ones who were left were demoralized by the process. I don't get the thinking on this. It sounds like Circuit City's execs thought evidently we didn't cut people enough, so we'll do it again—after all, it worked so well the last time. It's irrational!"

Jack Kyser, vice president and chief economist at Los Angeles County Economic Development Corp., agreed. "At the end of the day, it's still the interaction between somebody on the selling floor and the customer. If there's not a reason to come back because of bad service, that's the kiss of death."

Not everyone's on the same page, however. Some analysts argue that as consumers become "more savvy," becoming experts on, say, the difference between plasma and LCD displays, the need for "expert" salesmen is diminished.

This strikes us as bass-ackwards. There's a lot of misinformation out there and, while some of it is no doubt perpetuated by incompetent salespeople, removing the most experienced and, presumably, most informed sales staff from stores is not in the consumers' best interests. Many, if not most, consumers need advice and guidance—both of which are already in short supply in the retail chain.

Circuit City's decision to eliminate its most experienced sales staff removes one of the incentives consumers have for frequenting it in the first place. If it chooses to compete solely on price, it is going to lose every time to the big box discounters and to the Internet.

For commodities, the big box stores are already winning hands down, and it's ironic that moves like Circuit City's "Black Wednesday" firings may increasingly drive consumers looking for personalized, informed service to virtual retailers like Crutchfield, Audio Advisor, and Acoustic Sounds, which provide the shopping experience consumers can no longer find in brick-and-mortar establishments.

Think we're overstating the importance of an informed sales staff? Home Depot, Inc.'s new CEO Frank Blake is betting that it's the key to success. Blake replaced Robert Nardelli, who resigned when the mega-store chain posted stagnant growth numbers for 2006, and one of his first initiatives has been raising pay levels to $30/hour in order to attract trade specialists—skilled craftspeople, such as electricians and carpenters—in a bid to improve customer service in its stores and thus gain back market share. Blake told Merrill Lynch that the wage controls instigated under Nardelli had "unintended consequences."

That looks like a lesson Circuit City is going to learn the hard way.