Circuit City to fire 3,400 workers, will hire lower-cost replacements

Circuit City Stores' (CC) decision to lay off 3,400 employees in order to hire lower-paid replacements is raising questions about the impact of severe cost-cutting on employee morale.

The consumer electronics retailer announced Wednesday that it was immediately firing store associates "who were paid well above the market-based salary range for their role." New workers will be paid less, although Circuit City did not reveal the pay of the workers.

Laying off workers who earn higher pay raises the risk of deflating the morale of employees who are left behind, says Penelope Trunk, author of Brazen Careerist: The New Rules for Success.

"People left behind are probably thinking they don't have a future there," Trunk says.

Those hourly workers who are laid off will get severance packages and can apply for open positions after 10 weeks.

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"We have and continue to pay competitive wages in the stores across the country, but we have to control costs," Circuit City spokesman Jim Babb says. "We've got to get our stores to adhere to wage ranges."

The layoffs could have broad impact:

•Copycats. Other employers could follow Circuit City's lead. Many already are trying to curtail compensation costs. Seven percent of companies plan to trim staff levels during the second quarter of 2007, according to a survey by Manpower.

"If lower-cost labor is available, it's the right thing to do. They're not a charity," says Francie Dalton of Columbia, Md., president of Dalton Alliances, a management consultancy. "If it was your business and you have lower-cost labor available, you should do the same thing."

•Employee morale. After layoffs, companies must deal with a demoralized workforce by reassuring them that the decision is in the best interest of the company and those left behind.

"You have to reassure (the remaining workers) that, 'You're OK, and we're a stronger company now,' " says Paul Endress, president and CEO of Maximum Advantage, a Harrisburg, Pa.-based company that focuses on applying psychology to hiring and retaining workers.

•Waning productivity. Employees left behind or rehired later at lower wages could struggle with productivity, which is common in the wake of corporate cost-cutting.

Circuit City, which like other electronics retailers faces stiff competition, reported a loss for its most recent quarter ended Nov. 30, and its stock price has fallen 39% from its 52-week high. Its share price rose Wednesday to $19.23, up 1.9%