Tuesday, December 14, 2010


It’s that time of the year again: bells, baubles and bonus bubbles. I’ve called the latter bubbles because they are not unlike those much feared fragile things that happen in stock and other investment markets: inflate to catch the attention of all and sundry and then … pop!.

For many, bonuses are a routine “13th cheque” factored into “entitlements”. I employed a day worker for 2 days a few December’s ago to help clear some refuse. After paying him the agreed rate plus a bit extra, he became extremely agitated at not being paid double for a “krismis” bonus.

Then there are those bonuses based on “merit”, leaving some angry, most petulantly envious, and a handful a bit embarrassed by their good fortune. Very few, if any, see their bonuses as the outcome of a deliberate effort by themselves to improve performance during the year: it’s the luck of the draw based on a tedious annual assessment where things are said that should have been dealt with routinely and regularly during the year. Then there are those that follow good profit performances as a gesture of gratitude and sometimes on top of the “entitled” 13th cheque or incentives.

Executive bonuses are in a class of their own and I dealt with them last week.

In writing the “Planet of the Apes” article a few weeks back and in a general review of the theme on incentives and fortune sharing, I recalled some strange quirks in the field of bonuses. One that caught my eye recently came from Australia.

clip_image002The owner of the Yabulu Nickel refinery, Clive Palmer was so enamoured with the company’s performance this year that he has given the 800+ staff some incredible goodies: the best performing 55 got a Mercedes Benz each, 700 a five-star Fiji holiday for two; and the worst performing 55 received week-ends at a 5 star luxury hotel. Incentives have worked well for Palmer, who was able to turn around the previously BHP Billiton owned refinery from a loss into success on a staff incentive drive.

Clearly there’s more to it though. Palmer has been able to get everyone enthused and involved with the saving and sustainability of the venture. The size of the rewards reflects a large measure of “fortune” sharing with the variable part of the total package higher than the norm. Its sustainability, of course, is going to depend on staff expectations and the extent to which these can be tempered by the involvement that made the payouts possible in the first place.

I saw something similar, although on a much smaller scale, while consulting to a gold mine on the West Rand some years ago. I arrived one morning to find the General Manager very animated. He had received an envelope with about R40 in cash. So did everyone else at the mine. The camaraderie that day was tangible and transcended all hierarchies. This mine had a simple bonus calculated quarterly on gross revenue, which was close to a value-added measurement. The results were shown on a huge “thermometer” at the entrance gates, and when it “spilled over” everyone knew a payout was due. This seldom exceeded R100. It was a unique “common effect” trigger which became part of my thinking on fortune sharing, and at the time I thought it was an ideal involvement tool.

A few months later, I arrived at the shaft to find the place in a mess. Rubbish was strewn everywhere. I was told that news had leaked that management were mooting staff cuts to reduce costs and that the surface cleaners were the first in the firing line. So in solidarity with their cleaning comrades the surface was trashed to preserve jobs. It makes one wonder whether municipal workers have the same thing in mind during strikes. It reminds me of that Bastiat satirical sketch in which the 19th century French economist suggested that all workers should tie their right hands behind their backs because it would make work more difficult. This would create more work and in turn more wealth.

What the mine incident taught me was that involvement cannot be achieved by incentives alone, even if they are structured to affect everyone equally. The key to involvement is more about sharing understandable information than it is about sharing wealth.

At another mine some months earlier, incentives for underground workers were structured to promote production. The base was meters mined very much like my father’s high speed developing days. Month after month teams were called into “lo-offees” to receive their production bonuses. Until out of the blue, they were all called in and retrenched. Both the gold price and the ore grade had dropped and the bonuses being paid were simply unaffordable, leading to the closure of the shaft.

Fruit farmers here have a similar problem. They pay pickers according to volume, leading to an indiscriminate handling of the fruit that causes bruising which surfaces days later. So they have to employ overseers that cost them as much as the pickers themselves. A team of pickers often contains a group that, to avoid being embarrassed, put peer pressure on the star performers to curtail their efforts. Others again, having earned enough to fund a few days of “moss” consumption, simply slack to zero effort or disappear to re-surface at another farm.

I did some work at one of those curses of modern business – a call centre. The incumbents were paid according to number of calls handled with little regard to the content of the call. Needless to say it had a devastating impact on client service, and the system was changed. One financial service company I know of stopped paying their agents commissions on products but rather bonuses on clients recruited and maintained. There was also an interesting twist on executive bonuses. It was pooled and the group had to decide on each share.

The need for a thorough understanding of the workforce before structuring reward systems is a universal rule. Our class at the Oxford Centre for Management Studies was exposed to a case study in which an electronics component manufacturer in a small Scottish town paid the assemblers a bonus over a certain quota of components produced. It lifted production for a while but quickly returned to the standard. Apart from the same negative peer pressure, they also discovered that the employees, mostly young girls from the village, lived with their parents and had to hand over their full pay without benefitting from the bonus.

Then there’s Keith, a Johannesburg accountant who fled the Gauteng rate race to move to the Overberg. Pursuing his first love of gardening, he bought an ailing garden service and within months was not only able to overcome local prejudice against “inkommers”, but had the books substantially in the black. He provides excellent service through personal supervision and by ensuring that each of his team (of which Jan Rasta was one) shares his passion for the job. After each job, Keith runs through the financials with his workers and where every cent goes. He then includes a share of the weekly profits in their pay.

It is dangerous to relate all performance to a “work ethic”. I would challenge any Korean worker to perform better under the conditions that our mineworkers have to -- conditions of which I have first hand experience.

A willingness to give the best of oneself is nurtured by much more than pay or incentives. It has to include a measure of virtuosity, a common contributory purpose and a sense of common fate, involvement, information sharing and leadership styles based on care and individual development.

Our largely Anglo Saxon inspired bonus systems have arguably become dysfunctional and counter-productive. “You get what you pay for”, they say. Often it is not what you expect.

Wishing my readers a festive season filled with contentment. May your choices in the New Year be the correct ones.

Sunday, December 5, 2010


While the media feed on the supply of daily snacks of executive pay disclosures and regular comment, there is a growing impatience with pay disparities in South Africa.


The latest include the report on Sasol executive pay increases, Sizwe Nxasana’s remuneration as First Rand’s CEO, Ebrahim Patel’s NGP suggested capping of high income bonuses and P.E. Corporate Services’ research that showed that S.A. executives are the best off of 850 companies indexed world wide in terms of disposable income and working conditions.

Pay disparity has two perspectives: a rational one that relies on empirical and quantitative supply and demand theory; and an emotional one based on ethics, morality and socio-political premises. These perspectives have become part of immovable ideological stereotyping.

But even the rational argument has major flaws. For one thing, it assumes that there is a functional “market” in executive skills and that a severe shortage explains the mind boggling levels of pay for these positions.

The fact is that the broad term “executive” is far too vague. In my years of dealing with business leaders, I came to identify three distinct, albeit sometimes overlapping groups: the creators, or virtuosos; the Corporate builders or real entrepreneurs, and the professional managers or deliverers.

The creators or virtuosos are the real and more tangible value creators. They mostly bring something completely new or a much improved product or service to the market. Apart from the IT legends, South African examples are Raymond Ackerman, Koos Bekker, and Adrian Gore, to name but a few.

clip_image004The corporate builders are those who create big “empires” sometimes from scratch or from a modest organic company. They may not get the acclaim of their virtuoso compatriots, but I would argue that they are as talented, awe inspiring and significant. They add considerable value in mobilising capital, giving virtuoso’s a platform for vast expansion, and promoting efficiencies and global competitiveness. Corporate builders very often have a strong sense of ethics and a very clear moral compass. Names such as Warren Buffet, Johann Rupert, Brian Joffe and G.T. Ferreira, come to mind.

Others, such as Donny Gordon, Bill Venter and Richard Branson have elements of both creators and builders. Unfortunately the latter category can also attract rogues such as Jeff Skilling, Bernard Ebbers, and our own Brett Kebble, who put together a paper circle of capital conveyor belts with huge spillages filling their own bank accounts.

We should not begrudge people in the above categories their wealth or rewards (apart from the rogues of course). Given its popular definition, we should not demean them by calling them “executives”. They are autonomous, independent and beyond the reach of any head hunter. To think that you could “recruit” them is the same as believing you can get Oprah Winfrey to open the Swellendam High School fete. There is no “market” for these people.

However, there is a “market” for the third category – the professional managers or deliverers. In most cases, they are the captains of a ship and sail to the co-ordinates of shareholder value. Without detracting from their contribution, their “price” should be thoroughly scrutinised against supply and demand because, unlike creators or builders, they are recruited and appointed as employees.

Implied in demand for them is that they have the same passion, fortitude and aptitude as the builders or creators. This is seldom true. Creators and builders attract investors by their independent and creative thinking, not by submitting to shareholder whims. By exception do they stay in the corporate cocoon. If a deliverer possessed the same qualities as a creator or builder, he or she would most likely leave to become that. Indeed many do.

It’s been said that deliverers are offered the same rewards as the others to make them “think like owners”. The logic of paying someone huge amounts to think like an owner, escapes me. You can only think like an owner if you stand to lose everything, not merely a part of a fortune where the remainder is enough to retire comfortably. The most telling attribute of creators and most builders is their ability to take risks and look beyond immediate self interest. Executive incentives do the opposite and will attract opposite attributes.

Incentives divided into short and long term deliverables or guided by Balanced Scorecards and Triple Bottom lines have arguably had little effect, certainly not more than public pressure or Mervyn King have had. As Alan Greenspan discovered, people orientate towards short term rewards. In any case, much of shareholder focus is on short term results. Generally, there is a growing perception of a disconnect between reward and actual performance, seriously eroding the credibility and validity of incentives themselves.

The modern large corporation seldom relies on the outstanding attributes of one person, but on a whole team who can legitimately claim to have contributed as much as the CEO without sharing in the rewards to the same extent.

The third fallacy of demand is that there is a “global” market for executive skills, so called “peer-group benchmarking”. This is really by exception and most of our executives are simply not exportable, even in our multi-nationals. The “brain drain” of professional and technical skills is far more serious. The tendency to make peer comparisons in all sectors, right down to local government, spreads inflated pay like a computer virus.

Then there is the grey, if not murky area of cronyism, where appointments are made on the basis of who they know rather than what they know. Some see it simply as buying significant lobbying skills, especially with government. I may be a bit naïve, but I see a very thin line between this and “tenderpreneurship” or even corruption. Such attributes should be restricted to non-executive directorships at best.

The biggest distortion in the executive skills market is on the supply side. It is common cause that BEE has failed. In addition, by putting a premium on available black executive skills it not only narrowed supply considerably, but generally inflated executive pay structures. Perversely, one of the main intentions of BEE of narrowing the income gap has had the opposite effect.

But the real problem in the supply of executive skills is the artificial walls against entry. This was brought home to me by the pod-cast Alec Hogg had with leadership recruitment expert, Johan Redelinghuys. The insistence on a “track record”, sometimes not even an impressive one, excludes not only the many senior and talented people from other ranks such as academia, but also the thousands of qualified and experienced younger talent from both within and outside the company. The best way of bringing down a price is to open the gates of supply. Head hunters and selection committees can play a significant role in honing their aptitude finding skills, casting their nets a lot wider and finding those less costly but equally talented gems beneath the surface.

It is clear that the rational response to pay disparity in South Africa has some severe flaws. Unfortunately it has gone far beyond an interesting topic for columnists, conferences and academic treatises. The emotive and behavioural dimensions have pushed the issue to crisis levels and the negative perceptions around the more transparent levels of executive pay have to inform remuneration policies. We simply don’t know what the cost of pay disparity and its often accompanying “bling” is in social unrest, crime and distrust. It must be significant.

History has shown that classism, whether by blood, status or economic circumstances, is a highly dangerous condition in any society. Add a perceived or real racial context and it becomes explosive.

Something clearly needs to be done if we wish to avoid enforced economic egalitarianism. It is far better to address imbalances by correcting supply or demand than it is by fixing a price.

Sunday, November 28, 2010


Jan is a Rastafarian. I’m not sure whether he embraced the faith because of its easy approach to pot or whether the dreadlock hairstyle drew him in. It’s a puzzling thing though with Rasta’s: after spending days on cultivating their braids, they cover them with a tea-cosy.


Jan is the best lawn manicurist I have come across. We travel 30 kilometres a fortnight to pick him up in town, and then pay him at least 50% more than the going rate for a local part-time gardener. His favourite equipment is the petrol trimmer. This infernal buzzer makes my blood boil and also disturbs and angers all the distant bee hives. But Jan persists in its use even against my instruction that he deploy the 4hp monster mower to cover most of the thousand or more square meters of open space. He cares little too about the need to have the trimmer’s driving shaft rings replaced regularly at nearly the cost of a new machine.

Perhaps it is because the grass is too delicate. It’s an indigenous species that, unlike kikuyu, would leave a small quarry in the wake of a rugby scrum. But I think it is more the mysterious union that happens between Jan and the trimmer. Strapped to his side, man and machine are locked in a magnetic merger that sees them float as one in a ballroom waltz across the lawn. The big mower is simply too crude and by Jan’s reckoning too slow. After his floating like a butterfly and threatening the world with bee stings, he has left behind a carpet that could rival the best bowling green.


We call them virtuosos. They are masters of their craft. These are folk that are, to say the least, totally captivated by the task. They do not need and often don’t have a lofty “transcendent” purpose such as contribution to mankind, and even less so a material reward as a driver. That’s not to deny the latter’s need for sustenance. But to them it is a simple matter of recognition, courtesy and respect for a fair deal. Virtuosos can be found everywhere, from Jan the lawn trimmer and Santiago the fisherman to Beethoven and Von Gogh. They exist in their thousands in all fields. We tend to recognise them and give them credit only when we are intimidated and in awe of the task itself – like in the creative and performing arts, or when they have excelled in an important field to the point of uniqueness. But in essence they are all the same – possessing a passionate love for the task.

We all have virtuosity in us – too often buried beneath six feet of soil that has been heaped upon it by the seduction of a material reward or money. So often the “workplace” is little more than a corporate mausoleum where we spend the best one third of our lives, finding some solace in cadaver camaraderie and of course that extremely important pint of pure blood at the end of the month. Some mausoleums even have trendy “fun things” like snooker tables and massage rooms to occasionally distract the corpses from the drudgery of their job description caskets.

clip_image006But to be fair, precious virtuosos exist in business too. Indeed without them not only would many businesses fold, but some of the greats would simply never have started. Like Apple’s Steve Jobs, the Google guys Larry Page and Sergey Brin; or baby FaceBook co-founder Mark Zuckerberg. These are the John Galt’s of the world – not the profit driven rogues that Friedman favoured and that many still insist are the engines of innovation and prosperity.

To borrow a sketch from Dan Pink: a fellow applies for a small business loan from his bank and explains to the “suited” bureaucrat that his business model is to give his product away for free and get people to supply the product for free.

“Not today, Mr Zuckerberg - not today!”

And to irritate profit theorists even further, these folk join the likes of Kellogg, Johnson, Ford, Gates and Ackerman in denying that they were profit driven at the outset. They all claimed to have had a transcendent purpose, wanting to make a difference, adding value to people’s lives, and doing something meaningful with their virtuosity. We call them liars or hypocrites simply because those statements don’t fit into our ideological paradigm and because, as one of the consequences, a large reward deservedly came their way. And even here, many of them want to give most of it away.

What is sad is that in so many cases, the passing on of the founding virtuosos leaves a large “public corporation” guided by narrow “investor” interests in turn driven by the metrics of EVA, EBIT, HEPS, RONA, ROTA, ROI and NOI – Warren Buffet disciples perhaps excluded. In fairness again, I can think of a good number of “successors” heading these giants that are virtuosos in their own right. But I can think of just as many, if not more, who have allowed money to muddy motive.

Jan the lawn trimmer is a case in point. Prompted by his spouse, he left his full time gardening service job based on flexible pay for one with more security and status at the local “Korporasie”. It did not take Jan long to discover his mistake, only to find his previous job taken. So Jan’s floating with a beloved trimmer is now restricted to a few times a month, although he does have other ways of finding a state of Zen.

Monday, November 22, 2010


If it were a group of South African bakers meeting in Seoul to discuss the price of bread, they would have faced some very hefty fines from the Competition Tribunal. But no, these were the revered heads of the Group of 20 most influential economies in the world. And they were not discussing fixing the price of bread, but rather their exchange rates and the entire range of products on their export catalogue. Let’s put it this way: if the Americans and some others had their way, you would be paying at least 30% more for that Chinese bakkie or motor scooter.

clip_image002To add to the irony, the world is lamenting the fact that they were by all accounts not too successful in drafting a practical action plan for this collusion, while still (and this is the extreme irony, if not hypocrisy) swearing allegiance to “free and floating exchange rates.” Cliché’s like “you can’t have your cake and eat it” come to mind.

By now every Joe Soap has become foreign exchange literate – indeed many of them “traders”. We all know that a strong currency makes imports cheaper but plays havoc with jobs. A weak currency does the opposite but has a threat of inflation.

It was not all that long ago (as old men often say when they mean a generation past) that our small pioneering team of economic journalists at the SABC was struggling to convince the controllers of news to allocate a few minutes for “economic indicators”. We swung it with the entire monetary and fiscal establishments and organised commerce backing us. But those same controllers were so petrified that the standard anchors would get it wrong that they insisted that we present them ourselves. And so we gained our 15-seconds of fame – more like 5 seconds if you take the graphics into account.

One of our problems was in presenting the Rand exchange rate. Before the mid-70’s the Rand was pegged to the dollar and quoted in dollars per one Rand. At that time you could buy $1.30 for R1 which would be expressed today as $1 = R0.75c. Shortly after the last formal 15% devaluation in 1975 South Africa joined the floating exchange rate regime, first in what was called a “managed float” pegged to the dollar and then onto a free float. But of course, we all know that monetary authorities across the world try and “manage” the exchange rate, while avoiding the loaded term “manipulating” their currencies to suit a political agenda.

These off the cuff reflections are not mere nostalgic ramblings. The point is that the then new Minister of Finance, Owen Horwood, had a severe time of it in championing a politically unpopular devaluation. Later we and our print colleagues were sternly lectured by Dr Gerhard de Kock, former SARB Governor on avoiding terms like “weak” and “strong” when referring to currencies, but rather to say “cheap” and “expensive”. And to ensure that any reports on exchange rate movements reflected the cause which was often dollar strength.

I went on the air explaining this one night, and a few days later a daily newspaper had a cartoon depicting a puny Rand in a boxing ring with a well built Dollar as his opponent. I was shown whispering into the wimp’s ear”: “Don’t worry. It’s not you that is so weak; it’s only he that is so strong!”

The bottom line is that a consistently strong currency reflects economic health, and a weak currency the opposite. This axiom is rooted not only in classical theory but also in common sense.

clip_image004De Kock’s lecture on semantics has clearly fallen on deaf ears. Perversely, the term he baulked at – “a weak currency” is now a desired state. Even workers are toyi-toying to trash the Rand. What would really make him turn in his grave, I suspect, is the view that a “strong” currency is undesirable. He was a huge admirer of Switzerland and its monetary management. This stemmed from his passion for the Central Bank’s task of protecting the integrity of the Rand domestically and internationally. If a free exchange rate is allowed to do its job, he would have argued, it should do nothing more than reflect the strengths and weaknesses of an economy and then move to correct imbalances especially in trade and capital flows. It’s a bit like a thermostat – cuts the heat when the temperature is too high, and switches it on when it is too low.

What we are witnessing is severe interference in that mechanism. The thermostat settings are simply being tampered with to turn up the heat without checking its efficacy – like whether the doors and windows of the room being heated are closed or whether the heater itself is working.

Simplicity is the essence of broadcasting. I quickly learned that if you cannot explain something to a 14 year old, it is because you don’t understand it yourself. In broadcasting you cannot be the “king with no clothes”, hiding behind complexities and jargon. If you don’t understand it, don’t say it! Few things amuse me more than when you break things down to their fundamental basics, you get the defensive response: “but things aren’t that simple.” It’s the same as that famous infidelity line: “It’s not what you think!” Invariably it is what you think, and invariably it is that simple!

That’s the beauty of behavioural economics. While it is not an exact science, it is closer to our economic essence and valid intuition. You will get as much of an insight into economic fundamentals if you understand your own and others’ behaviour as you will from books. After all, “economics” in ancient Greek means nothing more than “good housekeeping”; something they have clearly forgotten.

In this context we may ask: what’s so wrong with a currency war? For those who do not get involved, a stronger currency means cheaper imports including the all important capital imports such as plant and machinery and it puts a lid on inflation. But more importantly, it forces you to be super competitive, super efficient and super productive.

I accept that there’s a point at which a currency can be severely overvalued given its domestic circumstances. At the same time, currency depreciation can be used to hide all kinds of sins such as low competitiveness, low productivity, waste, inappropriate wage pressure, and government inefficiencies. Few things work better in denying a spoilt brat his way than the response of “I don’t have it!” Mind you, you should not have promised it in the first place. Of course, if every country gets involved in the war, then it is back to square one only with the prospect of rampant global inflation.

We can also ask whether the floating exchange rate system has not become so contaminated with speculation, derivatives and national interest manipulation that it has become dysfunctional and needs some or other Bretton Woods type of anchor again. World Bank President Robert Zoellick seems to think so and has even suggested gold as part of that package. National interest and principles seldom make good bedfellows.

The real and many imbalances in the world cannot be addressed by currency fiddling. Exchange rates fluctuate quicker than you can say “j-curve” and I am yet to be convinced that anyone can do long term planning or large job creating investments on exchange rate expectations. There’s no quick fix for years of succumbing to rampant expectations way beyond affordable reality, and a global cappuccino economy creating froth liquidity without tangible added value.

These are the doors and windows that remain open while we fiddle with the thermostat.

Monday, November 15, 2010


I know it’s a bit of a charged title, especially in South Africa. My vague belief in the mystical powers of Karma restrains me from wishing the most horrific of tragedies on anyone who puts an ethnic connotation to it. For the title is informed by the largest part of the human condition throughout the world.

clip_image002Monkeys, you see, can be taught to do just about any task. They do so willingly when rewarded with peanuts and get better at it and do it more often the more peanuts they get. Sound familiar? It should, because that is how we have set up most of our working environment. The more I pay you, the more I can expect from you. I sometimes wonder whether it does not start with parents paying their children incentives to get some odd jobs done around the home. I am reminded of a news photograph of the recent strikes which showed a striker holding a placard proclaiming “pay peanuts and get monkeys”. Only, this striker had the placard upside down. Perhaps he was not lamenting the peanuts, just the amount of them; because the analogy is apt, whether payment is in peanuts or money.

Yes, this is going to be one of those many articles on money as a motivator. Motivation must be one of the most written about subjects of all, certainly in organisational theory. If you want to make a lot of money by just talking, get onto the “motivational speaker” circuit. All you need are some marginal speaking skills, a lot of rehearsed quotes, or to have made your name in one or other field, including acting, sports or sometimes even crime. Yet, one of the world’s great motivational gurus, Peter Drucker, once remarked: “We know nothing about motivation. All we can do is write books about it.”

So I am wondering if money is the great motivator, why the mystery? Why all these books, videos, talks, and multi-media paraphernalia if the answer is so simple – just give more peanuts. Because we know it is not. And the only people who don’t seem to get it are those in business who structure the employee environment. It’s mostly based on monetary incentives, from the top to the bottom.

“Why do you work?” I would routinely ask one of the more petulant participants in my workshops.

“For money,” would be the response.

I would then ask if they would be motivated more if I increased their pay by say 5-fold. Without thinking most would say “yes”. I would then sketch a scenario in which I would increase their pay 5-fold, while at the same time removing from them the burden to work at all. They would have to sit in an office and do absolutely nothing for 8 hours a day. After a joke or two about “so what’s different”, the respondents would quickly realise that the state would be totally intolerable for more than a week or so.

I know it was not a very scientific process, although I repeated it hundreds of times with the same effect. Maslow, it is said, structured his Hierarchy of needs on the basis of an interaction with a handful of college students. The point of my exercise was to show simply the disconnect between purpose and pay; between meaning and means.

No study or authoritative work will deny the importance of pay. Its importance is not as a motivator, but as a potential de-motivator. When people feel they are not being paid fairly, they will be de-motivated. Herein lies a huge problem. The perception of fairness, particularly in South Africa, is based on runaway unrealistic expectations, comparisons and huge pay discrepancies. To add incentives into this mix compounds the problem. A powerful counter to expectations is involvement through a fortune sharing system, rather than monetary incentives based on tasks and measurements.

clip_image004In refraining from referencing a huge volume of work from scripture and popular guru’s to the testimonies of ex-junkies, I’m going to refer to some recent work which was brought to my attention by colleague Mandy de Waal. The research was done by M.I.T. first in a student environment and then replicated in rural India with the same results. Popular motivational writer Dan Pink presented these results to the RSA and anyone remotely interested in motivating themselves and others is urged to follow this link.

This study confirms that money incentives work well as long as it involves only mechanical skills. Just like monkeys! But the moment the task calls for even rudimentary cognitive skills not only do incentives not work, but the larger the incentive the poorer the performance. Now there’s a thing - we pay more to get less! It’s an interesting take on executive bonuses.

What really motivates the thinking human being, Pink says, is:

autonomy or being self directed;

mastery or the capacity to get better at the task

and -my absolute favourite- a transcendent purpose or making a contribution.

It is easy to achieve these conditions, even only partly, at any level of task. A NASA sweeper can move from “pushing the broom for the boss” (mechanical) to “making the floor come clean” (autonomy and mastery) to “helping to put a man into space” (transcendent purpose.)

Pink concludes: “When the profit motive becomes unmoored from the purpose motive, bad things happen.”

Yet that is how many have structured their business world. They simply cannot get away from the profit purpose of business. So at the very top they have the corporate board of gorillas – fixated by money and measurements. They pass these goals on to the executive orangutans who receive tons of peanuts for achieving them…sometimes not even that. Next in line are the chimpanzees that get bucketfuls for getting the unruly monkeys below them to meet their given targets.

Truly a planet of apes!

In technology and knowledge humankind has made extraordinary leaps on the evolutionary chart. But in thinking and behaviour we are often not much further than that creature second from the left…perhaps only a bit more devious.

It only takes a different way of thinking to change it.

Wednesday, November 10, 2010


Cake in my pre-teens was a rare treat and restricted to special celebrations like birthdays…and then not always. Its cutting was in the formidable hands of my mother. No-one dared to interfere in or influence this process, even if one was the subject of the celebration. It was an intuition I learned in infancy when no pitch or consistency of howling would capture attention other than a harsh response or inflicted discipline. I was, after all, only one of four siblings in the confines of the modest home that was the place of my birth.

So I was exposed at a very early age to one of life’s most important lessons: we are seldom, if ever in control of outcomes – we never know with certainty what we can get out of life, only what we are capable of giving. But exposure to a lesson is one thing: understanding and following it are another. I went through at least part of my life with a Newtonian logic that I was in control; haggling with creation until I ended up reciting the serenity prayer at least three times a week.

The lack of control of outcomes applies equally to companies. They too are in control only of the contribution they make. The outcome, or reward, is not in their control … unless they can fall back on questionable practices such as lack of competition, collusion, fraud, coercion and other devious acts. History has shown that these are seldom sustainable. They can also be costly as Pioneer Foods has just learned. Of course, the outcome is not totally random and unpredictable either. It occurs within the natural economic laws of legitimate transaction. But if we have learned one thing in the past year or two, it is that these laws can also be fickle and our influence over them flimsy.

Who then, should divide wealth created by a company? Who decides what each of the three contributors: labour, state and capital, should get? Here too it is not arbitrary. There is an omnipotent matriarch in the form of natural economic laws which I dealt with at length in previous articles. In short, these guidelines are pretty clear and have to make sense not only in terms of the legitimate expectations of each stakeholder but more importantly, the sustainability and expansion of wealth creation itself. It is here that rigid individual pay structures break the rules and are not suited to an environment of excessive unemployment.

The latest proposal to create 5-million jobs in 10 years is a non starter without some serious efforts at job retention. In turn this is feasible only if the destructive impact of rigid and rising wages is fully recognised, as Pravin Gordon did in his MTBS last week. The partnership he spoke of has to happen not only in lofty meetings between organised business, labour and state, but more importantly at grassroots company level where wealth is created. This is the main aim of fortune sharing: recognising the inherent partnership between the contributors to the creation of wealth, the volatility of wealth creation itself, and the need for flexible rewards to accommodate its inconsistency.

clip_image002While fortune sharing is an inescapable fact in all wealth creation, it has to be converted into a viable system that simply shifts the emphasis from flexible jobs to flexible pay. This means shifting over time, individual pay based on guarantees and contracts to a larger proportion based on risk linked to the size of wealth created. This clearly cannot be an overnight event. It has to be phased in over a period. The graphic shows such a shift over four terms. Currently, very few companies have more than a very small proportion of pay at risk linked to the overall performance of the company. These tend to be ad hoc and focused mainly at a more senior level. They never imply a reduction in pay, only the absence or size of a “special” allocation. Many do have bonuses, or merit related pay structured into the payroll and allocated differently according to performance at individual or team level, irrespective of the company’s overall performance. Fortune sharing implies placing a large part (ultimately virtually the entire pay roll) at risk according to the size of the cake.

Of course the shift has to be accompanied with concerted efforts at enhancing comprehension and understanding, trust, communication and transparency. None of these is insurmountable and can be achieved either with collective bargaining or at individual company level. The latter are also not mutually exclusive. I am going to simplify a vast amount of research and work with various interest groups into one condensed picture. The full conclusions and treatise of this work can be found in my book Value through Values, chapters 31-33. This includes a practical scenario based on a real company.

In short, benefits to all parties are determined by wealth creation itself. Calculating the proportions is perhaps the most important of all and while there are clear guidelines informed by market forces, it may require a large degree of discussion and haggling. Even then, it should not be set firmly in concrete and may need revision according to changes in company structure – e.g. a substantial investment in plant and equipment demanding a greater share to the shareholders. Also the proportions have to address first any imbalances in distribution that fails to meet the legitimate expectations of each group, and encourages their continued involvement.

Clearly, the contribution account does not fit snugly on government services or N.G.O.’s. But the fact that their rewards are determined by the wealth creation of others puts on them an even stronger need for discipline and prudence in distribution and a clear task of promoting conditions for wealth creation in the private sector. Accounting for this will be shown in a separate article.

clip_image004For normal companies the graphic shows (again highly simplified) how a 5% increase in sales (income), accompanied by a 5% reduction in outside costs will lead to a 15% increase in wealth created. If its current distribution is well balanced, each contributor/beneficiary is entitled to its share of the 15%. In the case of labour, the predetermined fair share of 50% translates into a 15% increase in the overall payroll or R7.5m. There are several ways this can be treated. In its infancy, at least part should be placed in a contingency reserve to sustain basic pay. The need for this can fall away as people become used to dealing with variable pay in their personal finances. Part (or all) can be distributed to staff as a % of their gross pay; or part (or all) can be split equally on a Rx per employee basis.

The permutations are endless. So are the possibilities for commitment, excitement, enthusiasm and involvement. Many of our established large companies may seem to be, or may even be beyond redemption. But following even to a limited degree the concept of partners in maximum wealth creation and optimum distribution can create a template for understanding and transparency that can extricate them from a conflict ridden environment. The opportunities are better for smaller companies and new ventures.

Fortune sharing is for the mature only. It can accommodate any motive, but ultimately it lives best with benevolent intent and a strong sense of ethics. It is best driven by a service motive rather than by profit maximisation.

And I have argued all along that the former ensures the latter. The latter does not necessarily ensure the former.

Thursday, November 4, 2010


Fortune sharing is not a system. It’s a reality based on the simple understanding that all companies create and share wealth. The method and proportions of distribution rely on systems, perceptions, expectations, and an array of internal and external forces, sometimes coerced. The primary function of distribution - encouraging continued contribution - is often flouted, leading to the demise of the wealth creation activity itself. The inescapable truth is that no share can be so rigid as to ignore the volatility of wealth creation.

Historically, the most rigid of all has been individual pay. For decades companies have tinkered with flexible or variably pay systems to solve this problem. Research has shown that variable-pay systems do as a rule enhance productivity and rewards both for the shareholders and some individual employees. That is not to say that all have been successful; some have been dismal failures. The cost in terms of lay-offs, low morale, and employee stress and discontent under variable pay based on incentive is simply not known.

Variable pay is a very old concept. Its modern complexities may be at least partly due to our fascination with measurements and measuring tools such as computers, spreadsheets, databases and other software programs. In this too, I suspect, much of “what is being counted does not count and much of what counts is not being counted”.

The doyen of gain-sharing experts in the United States, John Belcher, has put variable-pay systems into three categories, each with a different formula for arriving at the rewards.

The first is cash profit-sharing. It is clearly determined by shareholder expectations being met at company level, although not necessarily only according to the standard headline earnings.

The second category is gain-sharing. While this term is often applied to all forms of variable or flexible pay, Belcher defines it as a system where the payout represents a share of financial gains. These are associated with improvements in team, group or organisational performance.

Thirdly, there is goal-sharing. Here a predetermined amount is paid for the achievement of team or organisational goals. These goals can be anything from monetary values to production output. Historically, gain-sharing has been developed from four roots:

· profit-sharing

· the Scanlon Plan

· the Rucker Plan

· Improshare©

The biggest drawback of most flexi-pay systems is that they are seldom fully understood by employees, especially at general staff and worker level. In most cases it is difficult to achieve “line of sight” (where the effect of actions are understood) and “line of effect” (where the effect can be measured) at the final accounting level. The image of profit-sharing schemes is severely dented when company reporting reflects less than the truth about performance. Puzzling executive payouts add to the distrust. In addition, some favourite bonus triggers such as EVA (economic value-added), EBIT (earnings before interest and tax), or RONA (return on net assets) and ROCE (return on capital employed) are often complex to the average employee.

My own biggest problem with profit-sharing is that it’s unrelated to common fate. As long as labour is viewed as a cost in accounting, shedding employees is the easiest way to improve profits. And if the purpose of incentives is to raise profits, then labour becomes the scapegoat and the profit-sharing scheme in effect exacerbates the divide between labour and capital. Some remuneration and gain-sharing consultants suggest that profit incentives be confined to senior management and executive staff, and productivity incentives be applied at a lower level. This can lead to a complete disconnect in benefits between the two groups.

Most productivity incentive schemes ultimately have a bearing on the individual and tend to cause internal competition and “angst” among colleagues that very few favour over time: even those who run away with most of the accolades. This is particularly so in many South African working environments.

Many companies have introduced share-ownership options for staff. These have been given different names such as SIPs (share incentive programmes) or ESOPs (employee share option programmes). Experience has shown that they work better at the executive level and less well at general staff level. In South Africa they have also become dubious instruments of BEE. They are in a class of their own and I have difficulty in defining them as flexible pay schemes. I will defer a more detailed examination to a separate article.

The Scanlon Plan is closely focused on cost-saving. Any reduction in costs is shared with employees as a gain. The scheme could be quite unfair but what softens it is that the measurements usually apply only to those areas where employees are in direct control. This feature adds substantial benefits in terms of understanding, credibility, communication and perceived fairness. But again, as long as labour is accounted for as a cost, some employees could benefit by lay-offs among their colleagues. The reason for Scanlon’s survival to this day and indeed for being reinvented in various forms is that it has tried to address these issues. But I dare say job retention is less of an issue in the developed world. Apart from relatively low unemployment, employees there have social security to fall back on.

The Rucker Plan was designed by American economist Allen Rucker after the Scanlon Plan was born in the 1930s. Despite many references to it in organisational theory, I could not find a case study showing where Rucker’s plan has been successful. Nor did John Belcher provide any in his writing. It’s nevertheless worth examining because it’s triggered by value-added or wealth created and it comes closest to a labour-empowering fortune sharing system.

Rucker toyed with the idea of a value-added statement (VAS) long before it became part of traditional reporting. That his gain-share system and the subsequent accounting format did not merge is quite surprising. Rucker’s critics argue that it’s the difficulty of the reporting format that made the plan vulnerable. I think I have already demonstrated that nothing is further from the truth. Contribution accounting, which is a derivative of the Value-added statement, is the most logical of all accounting conventions, the easiest to communicate and the least susceptible to expedient bookkeeping. The real potential of Rucker was in relation to common fate, which he unfortunately failed to recognise. Under his method, although the bonus payout is calculated at an organisation level, it’s still quite feasible and likely for employees to be given bonuses as a result of lay-offs of colleagues. This immediately detracts from common fate. The difficulty is not insurmountable, however, and it may be time for a Rucker revival. I will show how this can be done next week in examining how to account for a fully fledged fortune sharing system.

Improshare© was developed some time after Scanlon and Rucker. Whereas Scanlon and Rucker are based on monetary measurements (although Scanlon can include other physical accountabilities), Improshare© is based for the most part on physical productivity measurements calculated at team and individual levels. This meets a key requirement of “line of sight” and “line of effect”, and again makes for credibility, understanding and perception of fairness. However, when things are not measured in terms of monetary value one has no indication of how useful they really are. The concept of value-added puts a monetary value on the contribution one has made to the good of a customer. If the customer stops buying a product, the contribution ends – no matter what “inputs” of time, effort and mind are present. Physical measurements therefore have their limitations. You could be measuring and rewarding things that are adding no value.

There is nothing so useless as doing efficiently that which should not be done at all. — Peter Drucker.

At a practical level, the overriding message of variable pay today is that there really isn’t a generic template or formula that fits all circumstances. Consultants working in the field should avoid and be prevented from imposing their pet projects on a company. The system must be home-grown and be constantly polished in every detail. While crucial, design and implementation are less important than policy and intention. As always the “why” far outweighs the “what” and the “how”.

Variable pay can act as an incentive, or encourage involvement, or both. The two are not the same thing, however. What is true is that involvement will act as an incentive. But incentive will not always promote involvement by all; indeed it very often has the opposite effect. Involvement is about being focused on the contribution, whereas incentive is about reward. Variable pay can be empowering, compassionate and generous, but it can also become just another tool in the “what’s-in-it-for-me” kit.

In South Africa, the key outcome of variable pay should be to enhance involvement and trust, soften wage rigidity and counter unemployment. Conventional schemes can do the opposite: foster distrust, inflate individual wages and reduce employment.



Rhynfield Benoni: January 22nd, 1944

Monday, October 25, 2010

The Sharing Of Fortunes

The strongest bond in a collective is a common purpose. By its very nature common purpose cannot be based on multiplicity of participant motives. Its ultimate strength has to be based on the contribution which that collective makes to its outside environment. In the specific case of a company, contribution is about customers in the first place and the broader community, society and humanity in the second. All other benefits are consequences of this. The different motives of individuals in the collective are not of major importance. What does matter is that they take second place to the common purpose.

The future of organised labour will depend heavily on an ability to align itself with this cause. Labour’s traditionally inward-focused raison d’être was valid until a few decades ago. It is no longer so. Participative practices and the growing influence of world developments are putting pressure on rigid labour structures.

Ironically at the same time, American-style capitalism is at its most vulnerable; never before has there been such an opportunity for labour to align itself with those who challenge the unbridled-self-interest and profit-driven model and are concerned about huge imbalances, the destruction of nature, the plight of the poor and unemployed, corruption, crime and unethical business behaviour. For this alignment to happen, however, the unions must first champion the cause of the consumer and customer, since they not only belong to that group but are also there to serve it.

Ultimate success is going to depend even more heavily on the ability to adopt the idea of common fate. To foster common purpose in a company is easy enough – indeed I believe employees can make better custodians of customer interests than most managers do, especially the executive. Alignment with common fate is where the biggest sacrifice is called for. But it has substantial benefits. It will blow away the smokescreen around labour, the idea that it takes no risk because wages are fixed and the only real purpose of a union is to ensure, through control and coercion, a regular increase in material benefits. This has been a bizarre fallacy that has led to heavy job losses and therefore of members. It’s time to recognise that the threat of retrenchments and dismissals far outweighs the threat of work stoppages and strikes.

During the last few decades, many variable pay instruments have been developed. Their initial intention was arguably not to protect jobs as much as profits, and to maintain a semblance of morale among punch-drunk staff. As they developed it became very clear that without some kind of employee participation they would fail. Indeed many have, for that very reason. The instruments go by many names under the broad banner of “gain-sharing”.

This is something of a misnomer because it implies sharing in the gains only, which in turn implies that if there are no gains, and indeed if there are losses, then management reserves the right to cut heads. As long as this is implied, the employee initiative is removed.

For labour to recapture this initiative it has to take the courageous step of offering a full fortune-sharing dispensation in exchange for reasonable guarantees of job security. In short, open to pay cuts in exchange for job retention.

There is an element of risk here. But it’s probably less than the risk of job losses. Acceptance of it will earn labour the right to be fully informed and fully involved in all aspects of the business. Labour will automatically switch its role on an organised level from taker to giver. This is true power. No variable-pay system will work without labour’s full cooperation. Given this guarantee, unions need not fear flexibility and should come to see it as a new instrument for enhancing their power. This does not mean that business cannot be the suitor.

There is also the fear that a failing company won’t be able to attract highly qualified staff unless it can guarantee a competitive package. This fear has no basis in actual experience. For as long as differentiated pay is supported within a variable-pay system, there is some obedience to the market. Gain-sharing has become a whole new branch of knowledge in organisational theory, covering highly complex processes as well as simple profit-sharing schemes which date back to 1835.

With the growth of gain-sharing has come some new confusing language and terminology. Reams have been written on it; thousands of case studies already exist. But no system of gain-sharing or variable pay has yet developed fully to the point of fortune-sharing. This may be because it’s necessary always to ensure some form of guaranteed or basic pay for employees. But the proportion at risk varies, especially in different countries, and it’s this proportion that tends to be a bargaining issue. The options range from “all-at-risk” in exchange for the guaranteed jobs or an assured lay-off package, to minimal risk for a large measure of job flexibility. Numerous checks and balances can be built into an agreement, such as one whereby the union is the final arbiter in any dismissal.

A useful analogy for fortune-sharing is marriage. A fully participative fortune-sharing company will need the same circumspection as one needs before marriage and will undoubtedly need the same degree of constant work, communication and trust-building to ensure its survival. Not all of us will be suited to marriage to begin with. Few marriages succeed if the partners are focused only on what they get out of the arrangement.

Ironically, most organisations that have variable pay also have a more highly paid workforce than their fixed-pay counterparts. This is understandable on a simple risk-versus-reward principle. One need only examine the experience of Japan and other Asian countries where they progressed from guaranteed employment at little more than a bowl of rice a day to the highest-paid employees in the world a few decades ago. China seems to be following this pattern.

As a business broadcaster I was invited to visit a counterpart in Taiwan in the late 1980s. At one point we were comparing salaries and I was a bit peeved that he earned nearly 75% more than I did. Moreover he was living in a country with a relatively low personal income tax rate and a fairly low cost of living. When he explained that only one third of his pay was fixed or basic, the rest depending entirely on the fortunes of his organisation, I became sympathetic – unduly so in terms of what I now know and think. He also told me that most employees preferred to work for a company where the variable proportion of the pay was high. They saw this as a reflection of a successful company, one that was therefore good to work for. In addition, most Taiwanese took an intense interest in the performance of the company and its fortunes. Another difference from the Western counterparts was that a struggling employee, instead of being subjected to condemnatory peer pressure, would be helped by his colleagues to improve. In a macro-context, Taiwan has traditionally had high levels of personal savings and national reserves. This has been attributed partly to the fact that the average employee was encouraged to budget and calculate debt-servicing needs on the basis of guaranteed pay, rather than factoring all, or even a portion of, the variable pay into his/her spending needs.

Full fortune sharing is outrageous to conventional true blue capitalist thinking. But we have to ask ourselves whether current and future socio-economic structures can sustain a war like competitiveness for resources at all levels, especially in labour where markets have arguably become dysfunctional. Fortune sharing, albeit only partly, and the co-operative approach it implies, has been shown to work in varying degrees and in various situations. It may not be attractive to large corporations with entrenched structures and beliefs. But it certainly should be examined for smaller companies, labour intensive ventures and labour co-operatives. It should never imply letting go of sound business principles or trying to maintain unreasonable returns for any stakeholder over an extended period. Indeed such companies should be able to compete against companies with conventional pay structures.

The survival of gain-sharing through decades, if not centuries, seems to show that its logic is based on much more than the measurable. The principle of fortune-sharing is about involvement of labour –and not about incentive. This is where many schemes go wrong. They are mostly driven by greed and the desire for self-enrichment and are part of the wage-slave chains. A values-driven company should be beyond such puerile things. Of course, involvement is a process requiring many supportive actions such as a common purpose, Contribution Accounting, understanding the business, transparency and communication, a high level of trust and servant leadership.

All it takes is a change in perceptions and the courage to do things differently.

(This post can also be seen on MONEYWEB)

Monday, October 18, 2010


With another strike threatening at Pick ‘n Pay, I can hear a near unanimous and emphatic “No!” in response to the question. Many ordinary South Africans, including employers, and without doubt organised labour, would point to the power wielded by labour in the ongoing strikes, the chaos and damage it causes, the chanting and toyi-toying masses, the news headlines, and the frustration that is felt in virtually every home in South Africa.

What organised labour in South Africa sees as its strength: its high profile role in society, its influential and much publicised leadership, pressure on the competition authorities and its participation in government through Cosatu’s involvement in the tri-partite alliance is seen by others as a weakness in terms of losing touch with rank and file membership, the unemployed and the economic realities of our time. But this is not why I posed the question. I also do not pose it on the basis of the threat of job losses to Union membership. I ask it simply against the background of the appropriateness of any collective in society that is structured fully and exclusively on the narrow interest of any group – albeit an important group – especially if that society is besieged by internal and external forces that can be countered only by a combined commitment by all interest groups.

It invites another Titanic analogy – only in this case instead of shuffling deck chairs, the passengers are fighting about who is entitled to sit on them while the ship is sinking.

A fruit orchard might look healthy from a distance, but closer inspection shows aphids that can threaten the whole crop. I have always used this approach to inform my intuition on potential developments. Extrapolations into statistics, accompanied by interpretations and ivory tower forecasts are useful and make for important sounding headlines. But they lose an important human and behavioural texture that touches the heart as well as the intellect. In turn it increases one’s understanding and empathy.

Such an aphid here in the Overberg has been the ploughing up of hundreds of hectares of blackberry bushes in the world’s biggest black- and youngberry producing region, because of a slump in world demand. Hundreds of picking and packing jobs are gone. Another aphid has been the willingness of KZN garment workers to accept less than minimum wages from Chinese employers threatening to close their factories. Yet another is Standard Bank’s warning that retrenchments are on the cards in the light of a decline in revenue and employees representing the “biggest expense”. There are thousands more aphids in your and other orchards. They all tell a story of events and developments largely out of our control – the world economy in a slump, overproduction and overcapacity here and abroad, declining demand and trade and currency wars.

We can try any insecticide, but none will work as well as our capacity to adjust, to be prudent and to be flexible. It’s all well and good for organised labour to insist on adjustments in national economic, fiscal and monetary policies, but to studiously avoid the contribution it can make by re-examining the behaviour of labour itself is not only disingenuous but is harmful to the workforce generally in the long run. Apart from inflating expectations at regular and arguably destructive collective bargaining times, there is, as I have argued before, a far greater responsibility: changing focus from reward to contribution. And let me emphasise most strongly that none of this detracts from the legitimate grievances that labour has and that I have always acknowledged. The question is simply whether it is at all productive for Joe Worker to “klap” Carol Consumer because he claims to have been “klapped” by Jack Boss. I know these are entrenched paradigms, enshrined in labour “rights” and that challenging them borders on sacrilege.

The question is also whether organised labour by focussing nearly exclusively on reward and only in small measure on contribution, is not playing up to labour’s weaknesses and not its strengths. Legitimate power always resides with contributors; with givers and not takers. True, those with power can abuse it to gain control on others, but then power loses its legitimacy and sooner or later it catches up with the abusers.

clip_image002The threatening Pick ’n Pay strike is a case in point. 2010 figures show that labour gets 65% of wealth created and investors less then 12%. My past analysis contradicts the view that top management gets an inordinate share. It used to be that the 5% at the top got about 10% of the total employee share. Of course, individual comparisons cause the ferment.

We have already seen in the Contribution Account that labour in South Africa is on average the biggest measured contributor to the creation of wealth – bigger than capital or the state. On this basis we could argue that labour should have a far greater say in the destiny of companies than it has. There are many reasons for its failure to be more involved but I believe a key one is that most employees (not all mind) do not see their workplace as a means of adding value to other’s lives, but rather as a place for self enrichment.

This view is entrenched further by the definition of labour as a commodity or cost: as Standard Bank did in reminding its staff that they are the biggest “expense.” Do not be surprised if in the hallowed office of the HR Director you find a wall slogan proclaiming that “people are our greatest asset”. “Asset” and “cost” are a contradiction in terms, even in accounting.

So the commodity/cost view of employees is firmly entrenched no matter how much team building babble tries to say the opposite.

There is another reason for this. The two categories in creating wealth – that of income and of outside costs – can both be volatile which means that wealth creation itself, which is simply income less outside costs, becomes subject to many forces both from within and outside the process. This rather unpredictable cake has to be shared with the three contributors, labour, capital and state. Both capital (profits) and state (taxes) are flexible and can accommodate any change in the size of wealth created. The only one that is not is labour, the biggest and most important contributor. To use another Titanic analogy: this is like nailing down a deck chair to create security on the sinking ship. Of course it is impossible. While individual salaries and wages remain inflexible, the size of the workforce becomes flexible. It is a simple trade off between pay and employment. More money is being paid to fewer people, exacerbating a very dangerous and revolutionary class divide between employed and unemployed.

Flexible pay is not new and I will deal with the various schemes in detail at a later stage, including the mother of them all: fortune sharing. Most current gain sharing schemes have done little to create real flexibility. They have produced a bullet proof jacket made of a single layer of silk. Indeed, in many cases they have added to labour “costs” and have been absorbed into the list of entitlements that have to be met, often when the company can least afford it. I believe it is because their rationale has been wrong: incentive as opposed to involvement.

The concept of comprehensive flexible pay that accommodates fortunes and misfortunes seems outrageous to both organised labour and business. Yes, for both it means sacrificing a key area of control. But is that not the point? Can they really be in control of things that can be so severely affected by events that they do not control? In all of my interaction with many employees at various levels, I have found overwhelming preference for security of work over security of pay. It makes sense at a national level: job retention is a far stronger, more secure, cheaper, and preferable method of combating unemployment than job creation is. This does not necessarily imply a blanket abandonment of sound social concepts such as minimum pay, simply that there can be far greater flexibility even within these prescriptions.

It comes back to the same principle: we are always in control of what we can give. We are seldom in control of what we can get. My favourite axiom that our true value lies in our capacity to make a contribution to others deserves repeating.

For most, this empowering capacity is to be found at their place of work. It is simply inconceivable that organised labour and business do not see this as a priority over all else.

This article can also be seen on MONEYWEB

Monday, October 11, 2010


The gravy was dark and thick, spreading slowly over the slice of warm, freshly baked bread. I would savour its steaming aroma as if in a trance while I made my way back to the table. There I would separate a small mouthful, ensuring that every taste bud of palate and tongue was exposed to texture and taste. My need to make each portion last as long as possible and the whole slice forever, was in conflict with an inner agitation that perhaps I could get a second slice if I rejoined the queue quickly before some of the other convent boarders had their first serving.

It seldom worked. I would be shoved roughly out of the line by an always bigger fellow. Even my two older brothers would studiously ignore my plight. On the rare occasion that a generous soul allowed me back in the queue, a second helping would be denied by the intimidating nun dispensing this manna. That interaction was always frighteningly the same. I would avoid her eyes as if approaching a giant gorilla. Her disapproval needed no eye contact – just a growl would send me scurrying back to my place. So at the age of five, I learned well the lesson of a “bird in hand” and “sufficient unto the day”. For the next few after-Sunday-mass breakfasts I would ensure that my single slice would last much longer.

Now, more than 60 years later, I occasionally catch a nostalgic whiff from some kitchen and my mouth will water. But it’s never quite the same. I have been on the gravy train once and no experience since has matched it – not even among the hundreds of formal banquets, parties, home cooked meals or first taste of some exotic elitist offering. As magnificent as they may have been, they have never embedded themselves as deeply and permanently in my memory as that one slice of unbuttered bread with a spoonful of gravy. It has remained my favourite snack, but no repetition has recaptured the first experience.

The point of this little cameo is to be found not so much in Oliver Twist but in Alexander Solzhenitsyn’s prisoner “enjoying” a meal in the Gulag. He removes an old handkerchief from his pocket and slowly spreads it in front of him as a tablecloth. From another pocket he retrieves a small chunk of bread and places this on the hanky. Then he breaks off a piece of the bread, puts it in his mouth, and with singular intent savours every morsel. Solzhenitsyn of course tells the story beautifully and in greater detail than I have done from a distant memory of the reading, but the point is that the prisoner’s delight in a bit of bread equals, if not exceeds, that of Onassis consuming spoonfuls of caviar on a yacht in the Mediterranean.

This leaves me puzzled. Is this the real key to contentment? Can we really envy Onassis above Shukhov if the meaning to them is the same despite a vast difference in form? Is this not simply our own pretentious perceptions?

It is not the man who has little, but he who desires more, that is poor. — Seneca.

This implies that contentment is mostly a self created state. We can find it in a Russian prison or in Auschwitz as Viktor Frankl did. We can find it in times of elation or intense grief as I did some 6 years ago. It is within our grasp moment by moment and ultimately it is the only real and lasting degree of immunity that we can create against contagious misery out there. No matter how troubled the water is on the surface, we can always submerge to a deeper place to escape the turmoil.

clip_image002Amazingly, despite all the wisdom of the ages, we have created a generation, if not an entire era, that thrives on the opposite – on expectations, comparisons, competitive “angst”, wealth and possessions and on misery if Daniel Kahneman’s Nobel Prize winning work is to be believed. It’s called the hedonic treadmill or the Easterlin paradox. Despite constant questioning, even by Kahneman himself, the Easterlin theory has not been shaken. All that the debate is showing is that perhaps we as humans don’t have a clear idea of what makes us happy. We appear to have difficulty too in distinguishing between concepts such as happiness, joy, elation, satisfaction, contentment, serenity and peacefulness. Measuring these remains an aloof and impossible task, especially on a national scale.

So even if we are armed with all the research, life-style writings and motivational paraphernalia, our own personal experiences only will give us the answer. What follows are my own personal brushstrokes on a canvas that may never reveal a full landscape. What I see much of these days is that we seek answers in cocooned and cynical selfishness that blames the other, the “system”, the politicians, a race, mothers, fathers, economists, and the media. As if to make a contribution, we take cheap and personal swipes in responses, muttering “so there” as we withdraw into our self righteous glass houses. How much more could we have achieved by a single act of kindness or merely plain courtesy to another?

Prosperity has always been upheld as the provider of national contentment. The jury is still out on that postulate. Are money and possessions what they are made out to be? Do they satisfy the deepest wish for peace and contentment? I hear a chorus of “Yes” as I write, supporting my own instinctive response. As a provider of security it is suspect. We either transfer our insecurities elsewhere or to a fear of loss of what we have - a fear greater than that of not having. The joy we get from the pleasures and comforts of wealth is momentary. It’s as transient as we are as physical beings. Certainly, the more we have, the more we can repeat these moments…until the caviar becomes boring. We marvel at each new experience and pleasure, until it becomes a routine, and then we move on to the next one, the next and the next in a form of dazed dancing. Kahneman calls this the aspiration treadmill.

We will gaze in awe at a moon landing, and only briefly glance at a rose, whose existence is even more miraculous. We get to a point where we appreciate our comforts only when sparing a thought for the have-nots. We try to sustain our happiness by assuming that others are miserable in their simple lives. We think that those who have more than we do must be happier. And we are caught in a spiral where the more we have the more we want.

Research has produced volumes of results showing that money is not the motivator or the provider of contentment it is thought to be. Any correlation between the two reveals on deeper reflection that money can be a means to achieve meaning. But according to Carl Jung, meaning only becomes meaningful when it helps us make a difference to other people’s lives.

I wrote this article as a break from my current themes. And also to illustrate that the degree of immunity we can achieve at company level, can be achieved even more so at a personal and individual level. I found myself returning to the research I did some years ago for Value through Values and was amazed at how rapidly perspectives are changing and how important they have become to classical economic theory. Quantitative theories are rapidly being either discarded or being seen as only one part of a much bigger picture…one that is still far from complete. This is very exciting, and will constantly be the underlying theme in The Human Touch on MONEYWEB. What it implies is that as we get to understand the interaction between behaviour and outcomes we will increasingly question current and historic theories.

This leaves me wondering whether the times we live in are not signalling the imminent end of the grand celebration of wealth and possessions, and out of the choice between austerity and accelerated consumption we are going to be left with a deep appreciation and gratitude for what we already have inside of us: contentment in simplicity. Perhaps it’s a choice that nature will help us make. Better so than to have it removed by a “system” or misguided ideology.

Whatever the choices and whatever the outcomes, best we start taking our serenity supplements now. It’s a state worth having under any circumstance.

This article can also be seen on MONEYWEB

Monday, October 4, 2010


In writing this article, I feel like a solitary and forgotten soldier in a trench - the enemy in front and the threat of friendly fire from the rear. So I hope a white flag will be respected just long enough for me to state a case before I fall prey either to an enemy bullet or misguided shelling from behind. For what I want to explore is perhaps the unthinkable to many: the inherent benevolence of shareholding.

There is a principle in free enterprise which has been its most laudable attribute and the mainstay of its defence. That attribute is that it is the best and most efficient way of moving resources to where they are most needed. Many argue that the fact that it has not done so, as evidenced by the severe imbalances in the world today, is an indictment of the “system” itself. My response is that a laudable concept was severely perverted by reliance on, indeed the encouragement of greed, acquisition and unbridled consumption. At the same time I have presented the case for the opposite: the rescue of this approach by a re-examination of motive based on benevolence in turn founded on the basic rules of transaction.

One of the most essential functions of an efficient market is to move private “capital” to where it is most needed in the production of goods and services and as a contributor to creating tangible value. An expanded view of its role includes the facilitation of demand through debt and to enable the transfer of risk through derivatives such as futures and options. The latter, first recorded in the 3rd-century BC was seen as a benign method of promoting market efficiencies.

It paints a pretty picture from a space shuttle. Money flows to people to make things, to others to help buy things, and then to a few speculators to reduce some of the stress. Well, back on earth we can see that it all went terribly wrong. Globally, debt has exploded to what many believe is unmanageable levels estimated at about $64 trillion in public (government) debt alone and $700 trillion in notional amounts in derivatives, in turn geared to create 70% froth in the cappuccino economy. Investment in productive capacity, where customers are served, tangible value is added and jobs created, has been left behind like a Cinderella in rags. The Financial Times reported recently that since their founding in the 90’s the hedge funds Quantum and Paulson have together made more money than either Walt Disney or McDonalds. Business Report columnist Anne Crotty (BR15/9) has likened the industry to a dung beetle that has assumed a dominant position in the body from which it previously fed. “The tail is now wagging the dog”. Competing for capital has put pressure on companies to maximise short term shareholder returns.
Since the days of moving from barter, capital, whether in sea-shells or shillings, has always been part of the inescapable process of wealth creation. Broadly today, the production of goods and services in private hands has to obtain capital either through debt via financial institutions and others, or through share capital. This can range from getting money from a few pals to issuing a large number of shares for sale to the public on formal exchanges. Sometimes it starts with a few pals, and ends with a huge corporate with millions of shares widely held by a number of investors. South African legends are Pick ‘n Pay and Liberty Life.

While most of the media and investor attention is focussed on returns in a reward context, it can and has to be seen also as relative measured contribution. This contribution is the use of the capital. Ownership is always retained by the investor. One has to exclude share appreciation as part of the operational reward because this reflects the investment risk and reinvestment. It is similar to an appreciation of any other asset such as property or hard assets. This is in any case only realised as a profit or a loss on the sale of the asset, at which time the operational reward (and contribution) passes to someone else.

clip_image002I tried to resist showing my Contribution Account “cartoon” again, but I am more drawn to it in discussing shareholding than with the others – labour and state. The account shows that at 35% on average (again depending on the type of business) shareholders are second to Labour in the measured contribution to wealth creation. Because of the very different implications, the shareholder contribution is split between savings (retained income at 20%) and payout to the owners (dividend at 15%). The latter is also a deviation from the standard value-added statement, which adds interest and refers to it as “providers of capital”. All of the financial executives I worked with agreed that interest was better classed as an “outside cost”.

The two great attributes of capital’s contribution are: it’s willingness to reinvest a large part of its reward back into the company as reflected in the ratio between retained income and dividend; and being the last to get its share of the pie. But apart from the use of capital and exploring growth opportunities, shareholders appoint leadership and through the board guide the company’s strategic direction. This aspect has highlighted a crucial aspect of shareholder motive. If it is share price only and maximum return in the shortest possible time; and they appoint a predator in the chair with all the incentives to achieve this, they could find themselves feeding off a rancid carcase or facing Crotty’s giant dung beetle.

Then there is accountability: a debate that is long not exhausted and so far has not been fully addressed in the discussions on governance and the King reports. The “Propriety Limited” concept has served market orientated economies well. But as bizarre and extreme as it seems, under growing social pressure and increasing legislative controls, the day may come that, for example, the ageing former registered shareholders of a Union Carbide are called to account for having a vested interest in the company at the time of the Bhopal incident. The debate around contaminated underground water in South Africa has a smack of frustration that former shareholders in the culpable but now defunct mines can no longer be held accountable for the damage.

clip_image004As to shareholder motive? These are as varied as the compositions of shareholders are: from the single owner of a gardening service to the quoted corporate giant; from the institutional investor and pension fund to the portfolio manager and individual home based trader. The old strategic wisdom of “short term profitability for longer term wealth creation” may be making a comeback with the focus on sustainability. But I believe one thing is consistent: the intrinsic contribution of share ownership in companies that make a positive difference to our lives. Guided by this litmus test investment can be as, if not more successful, than if it were guided simply by numbers. Enron for one would not have looked very attractive whereas Capitec does. The real power of shareholders, as in all else, lies in the contribution they make within the guiding rules of legitimate transaction. Irrespective of motive, behaving this way gives a head start: sincerity a giant leap. Good share investment is rooted in the idea that you invest in a company as if it were your own; that the best holding is forever; that you judge company leadership by their honesty, ability and passion for the business and that you understand the nature of the business. Sound familiar?

I have now dealt with all three contributors to wealth creation. Although their proportional contribution varies from time to time, company to company, and sector to sector, there is no hierarchy of importance. As hackneyed as the concept may appear, they are a team that works at its best in giving the best of themselves for a common purpose of service to others.

I believe it is possible at the level of wealth creation to create pockets of excellence and a large degree of protection against contamination by external financial viruses, policies, ideologies and conflict. It is at this level too that one can effect meaningful change that could influence the surrounding environment. The wonder of the universe lies not in its infinite vastness but in a single atom.

This post can also be read on MONEYWEB