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)

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