Cut Costs The Hard Way: Put People Before Short-Term Profit


Wall Street has warm feelings for Lowes at the moment. It’s no wonder: shareholder primacy dominates its corporate culture now as its new CEO, Marvin Ellison, has chosen to lower expenses by firing thousands of workers and outsourcing certain services the retailer previously handled itself. The measure has been brutal to employees who weren’t offered any advance notice of the layoff nor any severance pay, even though some had been with Lowes for more than a decade.

At the same time, Lowes is doing something else just as pernicious, what so many corporations have been doing for years. It’s buying back $10 billion of its own stock in order to artificially inflate share prices. It has shareholder primacy fever in a bad way. The hypocrisy in all this is astonishing. While the bloodletting was proceeding, Ellison was announcing that the chain’s 300,000 employees were its “greatest asset.” Cynically, workers are told they can reapply for jobs, which is a way for the retailer to hire them back at a lower wage. One manager was fired from her $23.58 hour job and hired back at $12.22 an hour.

Labor activists are speaking out about all this. Does that send a chill through the hearts of Lowes management, or the leadership at other retailers? It should. Do they want a return to adversarial labor negotiations? This is the destination for Lowes. It’s all wrong-headed, and just plain dumb, even from the viewpoint of shareholder value, if you take the long view. As CBS pointed out:

Today In: Leadership
“Running a business didn’t always work this way. In the past, it was common for corporations to use a chunk of their profits to increase pay for workers and invest in equipment or other capital expenditures. That ethos fueled the growth of the American middle class, according to William Lazonick, an economist and professor at the University of Massachusetts Lowell. Then things changed. ‘In the 1980s, it became all about creating money for shareholders,’ he said.”

It isn’t real either. Buybacks inflate stock prices in an illusory way. And they are all about trying to be the most valuable stock on the market, rather than trying to build the most sustainably profitable business in a given industry. Winston Chua, an analyst at TrimTabs Investment Research, told CBS, ”There’s always some company that has a soaring stock price without doing buybacks, and everyone else has to keep up.”

Great retailers don’t go down this road. In a conversation I had a few years ago with Jim Sinegal, featured in Capitalists Arise!, he described how the powerhouse retailer he created, Costco, operates on principles almost diametrically opposed to what’s happening at Lowes. As CEO, Sinegal would crunch numbers ceaselessly, combing through every variable and metric, looking for ways to shave costs—without ever laying off or freezing wages. Employees were sacrosanct, untouchable. Everything else was on the table. The numbers most vulnerable were “selling, general and administrative costs.” That is hard work. It requires thinking.

As a result, he said nearly three quarters of every dollar the company spent was spent on its people. This highly-profitable company boasts an incredible employee retention rate of 94%. Layoffs are rare in this environment that values employee loyalty and longevity—which inspired customer loyalty as well. It’s just smart business: it costs an employer somewhere between a third to a half of a worker’s annual pay to train a new worker to do the same job later on. To achieve that retention rate, Costco pays above-average wages for retail and offers full medical and dental benefits, even to part-timers.

Yet if you want to hear about how to achieve exemplary levels of employee retention—as a flip side to the evils of expedient lay-offs—Ken Langone will talk your ear off about “employee mileage.” It’s the most important metric Langone studies when it comes to Home Depot, the world’s largest home improvement retailer—a company he helped found as angel investor.

Within each classification of worker, longevity is rising steadily at Home Depot—a sure measure of both employee satisfaction and future profitability. Langone cited specific numbers by job category showing that employee retention, at most levels, has gone up by a quarter, a third and in some cases, has doubled. People are sticking with the company longer and longer. District managers stay with the company for 16 years now, on average. Full-time employees for more than eight years. As Ken said, “The longer you keep your people . . . (the more it) reduces costs and increases the effectiveness of everyone employed at the store.” When you step into a store, more and more of the orange aprons will be wrapped around a veteran who knows exactly how to make your project a success.

How do they do it? Mapping a career path for everyone they hire. Stock options and generous bonuses, based on performance. Recognition for achievement. As Langone put it: “Respect the employees, pay them fairly, and treat them with dignity. We have 3,000 kids that started in the parking lot—entry level—that are multimillionaires today.” They own a share of the company they work for—and they weren’t laid off.

Most likely, as well may be the case with Lowes, when a company gets in trouble, the problem is seldom its people. The slash-and-burn strategy is destroying tomorrow’s profits for the sake of your stock price today. Better to turn your ship around and think about your shareholders years from now, unless your top management plans to depart with their quick profits before then and leave the mess for someone else to clean up. That’s certainly a plan, but an incredibly destructive one. Better to look to the real leaders for some tips on how to succeed with integrity and intelligence.

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