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Extra3/26/2007 12:00 AM ET

How CEOs rob workers, customers

MSN Money readers poured out their anger at Home Depot and exposed a huge problem. At too many companies, a bottom-line mentality encourages staff cuts at the expense of basic customer service.

By Scott Burns

In 1914, Henry Ford made a "bet the company" decision. Conventional thinkers thought he was insane. Those without Ford's imagination were certain his decision would send Ford Motor (F, news, msgs) into bankruptcy.

What did this radical industrialist do?

He chopped the workday down to eight hours, and he doubled employees' daily wages. But he did not do this out of compassion. He had no desire to share the wealth. He made a hardheaded business decision.

Absenteeism plummeted. Worker turnover virtually disappeared. So did the number of accidents; ditto the number of manufacturing defects. Meanwhile, productivity soared. And the automotive age was born.

Today, the reverse is happening. The entire structure that promotes worker security, health and devoted service is being systematically dismantled. As investors, we benefit from this. But the largest beneficiaries are corporate executives. Every dime they squeeze out of payroll drops to the bottom line. The same money takes them a step closer to realizing gigantic stock-option gains.

No, I'm not a closet socialist. I'm just observing and reporting recent history.

'Ludicrously short-staffed'

Skeptics should visit the MSN Money message boards. Read some of the 6,000 responses to my recent column about Home Depot. (And that's just the tip of the iceberg. MSN Money reports an additional 10,000 e-mails.)

Read through those messages and you'll find two things. First, you'll find an outpouring of testimony. It tells us how thoroughly Home Depot (HD, news, msgs) management policies have burned their customer franchise rather than build it. But the messages also come from present and former Home Depot employees. As one put it, "If you think being a customer at Home Depot stinks, try being an employee."

Messages from company employees across the country and in Canada tell the same story: The bonus system for managers is geared to cutting payroll hours. So that's what line managers do.

As a result, whole departments are ludicrously short-staffed, with reported instances of a single employee to cover multiple departments. Overtime is verboten. The problem is compounded by short-staffing checkouts.

For you and me, the result is simple: Home Depot maintains its return on shareholder equity and pleases Wall Street. It does this by reducing what one consulting firm calls shopper return on investment. We value our time, but Home Depot's management metrics have systematically devalued it, just as Home Depot has treated employees as liabilities rather than assets.

Frank Blake, who replaced the disastrous Robert Nardelli as chairman and CEO, answers (in message 3,860) that he is sorry "for all the stories you have shared." He concedes that Home Depot has let down its customers. Then he tells us that the company is already increasing staffing at its stores and that Home Depot is "launching a nationwide program to recruit and hire skilled master tradespeople to staff our stores."

Timid measures

Personally, I was touched by Blake's response. He sounds like a straight shooter. He clearly understands what is at stake. Whether he has the moxie to defy Wall Street and change staffing enough to make a real difference is another matter.

You can understand this by walking through the staffing numbers. According to its most recent annual report (2005), Home Depot employs 345,000 people in its 2,000-plus stores and corporate offices. Of that number, 26,000 are salaried. The other 319,000 are hourly employees. They are the ones you and I depend on in the stores. They are the customer support system. They work up to 38 hours a week and earn about $10 an hour.

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(c) CNBC
Lower pay for Home Depot CEO
Investors cheer the news that the company's new chief is getting a pay package that's significantly lower than his predecessor's.

Wall Street Journal reporter Ann Zimmerman, after attending an analyst conference, reported that Home Depot planned to add 15,000 net new employees this year.

Query: Is that a lot? More important, is it enough?

It seems like a big number. It amounts to about a 5% increase. It's also a lot of money -- about $300 million of added payroll. But when measured against the size of the company, it's a tiny gesture:

  • It's only 0.37% of sales.
  • It's a slender 1.7% of operating expenses.
  • It's a mere 3.2% of the pretax profit for 2005.

As gestures go, it's way short of Henry Ford. It's timid, not daring, when you consider what's at stake.

Then again, that $300 million is more than the $211 million the board of directors paid one man, Robert Nardelli, to leave.

Questions about personal finance and investments may be e-mailed to scott@scottburns.com. Questions of general interest will be answered in future columns.

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