Mar 12, 2008

The Hidden Risk in Cutting Retail PayrollBy Zeynep TonHarvardBusinessOnline.HBSP.Harvard.edu

Managers of big retail stores have an opportunity to boost profits by maintaining or increasing staffing levels even when sales are slipping.

That idea will probably sound strange to store managers, who tend to cut staff hours if there’s a dip in sales. Such cuts make perfect sense to the companies’ executives, given that big retailers place great weight on hitting prescribed targets for payroll as a percentage of sales. Moreover, reducing payroll often has no immediate discernible effect on other major factors in managers’ evaluations—typically, things like whether the store’s appearance is attractive and the bathrooms are clean. So managers get very used to the idea that if sales drop, payroll must drop too.

But my research shows that increased staffing levels are associated with better execution behind the scenes in places like the back room and that stores with better execution in some of those out-of-the-way areas have higher profits.

I analyzed four years’ worth of data from more than 250 stores of a large U.S. specialty retailer and interviewed more than 50 of the chain’s employees, from frontline workers to the CEO. My findings at this company dovetailed with my previous extensive research on executing tasks in retail stores. I discovered that staffing levels tend to have the most pronounced effect on tasks that don’t count for much in managers’ evaluations. At the retailer, I looked at data relating to two such tasks: the percentage of items that were supposed to be on display but lingered in the back room and the percentage of poorly selling or obsolete goods that were supposed to be returned to the distribution center but remained in the stores.

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