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.
While 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.
For 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.