Danish electronics retailer Fona is losing money so they just announced that all store employees must accept a 5-10% pay cut or face termination (Danish article via Google translate).

That’s a mistake and here’s why:

1. This is bound to make employees unhappy and frustrated leading to bad customer service and lower sales.
2. Those employees who can find a better job somewhere will do so. Fona will be left with only those who can’t get away.

Circuit City tried something very similar in the US a few years ago and saw exactly those two effects. And they went bankrupt a very short time later.

And if you’re in retail, staff is NOT the place to save money. A study found that:

… every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales.

What could they do instead? Here’s a fantastic example: In 2000 computer chip maker Xilinx was facing massive financial problems and they introduced a pay cut that was progressive and voluntary. Read the whole story here – it’s a fascinating case of facing a serious crisis with creativity, instead of with layoffs.

I wrote about this in my 3rd book – you can read the whole story of Xilinx here.

I just want to make it very clear, that I’m not saying that Fona’s decision is “mean” or morally wrong. They are well within their legal rights as employers. I’m saying that it’s a bad business decision that will end up costing Fona much more money than it saves them.

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