Monday, August 25, 2008

When All Your Best Employees are Going Broke

This piece started out as a solicited submission to Harvard Business Review for their "List of Breakthrough Ideas." After careful review, it was decided that the senior executives that are the target audience of this publication would find my breakthrough idea "counterintuitive," and I was asked to look for evidence of my breakthrough idea's effectiveness. UPDATE: My editor at HBR wrote: "We LIKE its counterintuivity – that’s what’s attractive about it. In fact, your idea beat out many dozens of others. I think it’s important and timely... The article also deserves more space than we could allot to it in the section. Likewise, the HBR has a fairly high bar…We just need more evidence, if you can find it." So, if you are a senior executive and would like to try a novel approach to running your business, please give this a try, and let me know how you make out.

The combination of skyrocketing food and energy costs, rising medical costs, falling real estate values and stagnant wages is putting increasing numbers of workers in financial distress. A distressed workforce can hardly be a productive workforce, and companies must do whatever it takes to make it physically possible for their employees to function. What can companies do to remedy this situation? The obvious step of increasing wages not only puts additional pressure on the bottom line, but can also fuel wage inflation. Also, It may not be the most effective approach.

A better approach is to treat the company and its employees as an economic unit: a single household, with a common set of costs. These costs can be cut very effectively by trading off slightly higher company costs against significantly lower employee costs. Each additional dollar paid out in wages is taxed as income, trimming it by about a third. It is then spent in the retail chain, generating profits for retailers and service providers, trimming it by another half or more. This same dollar can be stretched much further if the company uses it to buy products wholesale and makes them available to its employees either free of charge or for a nominal fee.

Many families are struggling with rising food costs. To help them, the company commissary can provide not just breakfast and lunch, but take-home dinners for the entire family. Periodically, it can provide other take-home items such as frozen chickens purchased in bulk, fresh organic vegetables from local CSA (Community-Supported Agriculture) farms, or a basket of popular foodstuffs purchased wholesale and assembled in-house.

Many employees are finding that their daily commute is eating ever deeper into their budgets because of the increasing price of fuel. In many cases, their ability to relocate closer to work is complicated by the stagnant real estate market and the higher price of housing closer to population centers. Telecommuting can help, but is only feasible for certain types of work. Here, the company can help by providing dormitories close by, which would allow employees to commute every other day, or even just once a week. For the younger, single employees, this may allow them to avoid spending money on housing altogether.

There are numerous other ways that a company can use its vastly greater negotiating power to effect significant savings for its employees while incurring a comparatively small additional cost. Examples run from directly providing family medical care through a company clinic to providing vacation packages at cost by renting out an entire vacation resort at a lower, negotiated group rate.

But perhaps the greatest opportunities for cost reduction lie in areas where employees' own efforts can replace services or products they would otherwise be forced to purchase, be it taking care of their elderly relatives instead of putting them in assisted living, or spending time with their children instead of paying for day care, or growing their own food in a community garden instead of shopping at a supermarket. Here, the company has to be willing to accommodate shorter working hours, trading off the slightly lower efficiency of having more part-time employees against the resulting vastly greater efficiency of the company community when it is viewed as a single household.

There is no need to couch such initiatives in purely negative terms of cost containment. Here is how Eric Schmidt, CEO of Google, sees it: "The goal is to strip away everything that gets in our employees' way. We provide a standard package of fringe benefits, but on top of that are first-class dining facilities, gyms, laundry rooms, massage rooms, haircuts, car washes, dry cleaning, commuting buses - just about anything a hardworking employee engineer might want."

If you feel that such special treatment may be required for the pampered software artists at prosperous Google, but not for your own employees, then take a look at the long list of benefits enjoyed by the enlisted men and women of the US Air Force, which includes 30 days a year of paid vacation and unlimited free air travel. This is a fine example of making the best use of what you have to make a difference for your employees: if what you have is plenty of jets, then why not let your employees travel as much as they want?

Although the results of such efforts may at first be difficult to quantify, should they succeed, the resulting competitive advantage is likely to become obvious. Let your hard-nosed competitors try to run their businesses with distressed, disgruntled, overworked employees, while you reap the benefits of loyalty, solidarity and ésprit de corps. In due course, this should make your competitors attractive as acquisition targets.

One ready objection that this proposal normally encounters runs along the lines of “If everybody did this, the economy would collapse.” If it were implemented across the board, this would cut retailers and the government out of their share of your earnings, reduce both corporate profits and government expenditures, shrink the overall size of the economy, making it unable to sustain a large and growing national debt, and hasten economic collapse and national bankruptcy.

But it is clearly a mistake to consider it likely that this proposal would be implemented by more than a handful of companies. Overwhelming numbers of corporate executives would regard it as professional suicide, because financial markets punish companies that put the interests of their employees ahead of those of their investors. And it seems equally outlandish to think that the actions of a few mavericks could significantly hasten economic collapse and national bankruptcy. In short, the macroeconomic effects of this proposal are not interesting. It is far more interesting to consider the notion that it is possible to safeguard a company and its employees against a continuously worsening economic environment, even onto complete economic and political collapse. The steps proposed in this article can be regarded as baby steps in that direction. The remaining steps are varied and far more difficult, and are beyond the scope of this article.


Anonymous said...

I've been mulling over a similar situation, and my inspiration was the large extended families that crammed into villas and farmhouses alike before the industrial revolution. My impression is that early businesses truly were based on families, and that family members took on a multitude of tasks as the need arose.

Anonymous said...

I'm sure you are thinking of the Soviet companies here, but many Asian corporations take care of their employees similarly. I have a friend who is a car designer at Toyota Motors, for example (a rather flashy job). He lives in a company apartment building on the company "campus," and eats in the company commissary most of the time. It is very cheap to provide housing for employees, because typically the company already owns some land, so there is only the costs of construction. It is typical to offer company apartments on a voluntary basis with a very cheap rent, of say $400 a month for a two-bedroom unit -- enough to cover the construction costs, and then the company gets a depreciation expense. The company commissary is also voluntary, but a lunch can cost less than $5. I personally ate at the commissary of the Nihon Keizai Shimbun (Japan's largest business newspaper) many times a week, for both lunch and dinner, typically spending about $5-6 for a meal.

The employee can then dispose of an extra car for commuting to work, saving another $6000 or so of after-tax expenses per year, and has an extra two hours a day not spent in traffic. The overall result is the employee has few economic concerns despite a modest salary. As is the case with the military, this is a comfortable situation for many people -- also, when many people are living in a company apartment, there is little "keeping up with the Joneses" to do.

Anonymous said...

Your idea seems to hearken back to the preindustrial family business, where the extended family shared living and working space and took on a variety of tasks as the situation demanded. Or perhaps the early industrial era when employers actually boarded their workers in the place of business and the greatest security was to marry into the firm.

Anonymous said...

You are right in your suggestion about the economic benefits of ollectivising buying power in the short term ony. What you are proposing will hasten a wider economic collapse as you remove the middlemen and the associated employment and cashflow from the local and global economy. If buyer collectives don't cause this then internet trading will -in the long run things will get worse not better but the change is unavoidable as the retail sector is the last significant source of economic inefficiency in the market place

Anonymous said...

One economic sector where these ideas can be relatively easily implemented is state and local governments that employ about 20 million people in the US. Most of them have vehicle fleets that could be used for employee carpooling, land that could be used for growing food or building employee housing, as well as the bargaining power to get discounts from other businesses. Some already provide basic medical care in-house in order to reduce health insurance costs.

Unlike publicly traded private companies, governments are non-profit enterprises by definition, and therefore under less pressure to be economically efficient. This should make it easier for them to diversify beyond their core services in order to provide for their employees outside of the monetary economy.

As the revenues needed to cover the cost of annual pay raises become increasingly unavailable, I would expect a greater number of local governments and perhaps large educational institutions (school districts, universities, etc.) to offer more non-monetary benefits as part of their compensation.

Anonymous said...

Beware the company town.
The workers who rent from the corporation, buy from the corporation, and depend on the corporation for all the niceties of life are at the mercy of the corporation.
It works in Asia since the employees plan to be with the company for life.
It will not work in America as long as the corporations' first duty is to stockholders, and as long as it pays them to 'divest' themselves of workers or keep the survivors living on tenterhooks to keep them malleable.
This is a good idea for a different country, or the military (which offers this 'onsite housing' option on a variety of bases) but it would lead to significant abuse and problems in the American workplace unless the greedy, exploitative mindset of much modern corporate management underwent a sea change.

Philip Brewer said...

This sort of thing makes a lot of sense whenever the economy is under stress.

During a period of inflation, for example, it's to a company's advantage to be vertically integrated--so that raw materials and sub-assemblies can be acquired through internal transfers, rather than having to be purchased with inflating currency.

Supplying workers with things like food and housing is just an extension of the concept--why pay them with currency that is worth more the day before payday than it is the day after? Better for the company to spend the money while it still has maximum value.

As anonymous says, though, the tradition in the United States is for employers to use such mechanisms as a way to trap their employees in debt-slavery, which will make everyone tend to be a bit cautious.

Dmitry Orlov said...

Here's an example, excerpted from NACD Directors Monthly. Research hat tip to Bronwyn at HBR:

Sometimes Good Guys Finish First... and So Do Their Companies

“Identify an underserved or poorly served critical market need, have the best product and best service to fulfill that need, take care of your people. I don't understand what's so complicated about that.”
–Scott Scherr, CEO and Founder, Ultimate Software

When the dotcom bubble burst in 2001-2002, Ultimate Software, a leading provider of strategic human resources management software, payroll software, HR/payroll services, and talent management solutions, saw its stock go from $15 to $2. But, built into Scherr’s DNA from his dad and grandfather is an unwavering value: “First and foremost, take care of your people; they're the ones that make everything happen. ”Against much resistance, Scherr refused to cut benefits to his employees or their equity participation in the company. The result is a company that has exceeded all its financial goals for 2005, 2006, 2007. This year the stock price was at a high of more than $41. What Scherr is most proud of is his company being selected this year as the number one best medium-sized company to work for in America by The Great Place to Work Institute, the same research and management consultancy that produces Fortune’s “100 Best Companies toWork for” list for large companies.

Anonymous said...

This couldn't work in hyper-individual American society. At least taken to the extreme like some Japanese corporations. Food related compensation would be widely accepted as food prices continue to rise.

But, many Americans would rather commute in traffic alone for an hour each way than live next to their co-worker half the week. Also, as mentioned above people do not want to give much control over their life to their employer.

What about neighborhood collectivism? I'll avoid digressing too much. It would bring peoples immediate community together and cut costs. Gradually it could morph into a cottage economy based on complementary skills.

Anonymous said...

Hmmm, smells of SOCIALISM to me...It would never fly in the USA as the ghost of McCarthy is alive and well!

Anonymous said..., if you called it "Googlism", it just might work...

Anonymous said...

The IRS taxes employee benefits if the benefit becomes too great. Even parking spaces provided by an employer to employees can be taxed under a set of certain circumstances.

Anonymous said...

I wholeheartedly agree with this approach, but it's basically a form of barter: trading food and shelter and other necessities for employee labor. I fully support barter arrangements.

I also support the idea of people doing more for themselves. Ironically, the U.S. military used to do everything for itself, which was very economical. Today it outsources everything to the private sector, which is extremely expensive. In other words, the military has moved in the opposite direction from what makes sense.

Of course, we've moved in the opposite direction from which we should in other areas too. For example, I always thought the European Union was the wrong direction. We should be moving toward more distributed, resilient, innovative and adaptable structures, not toward bigger and bigger centralized structures. The North American Union would be a similar mistake.

While these schemes look backward to me, they probably make perfect sense to the elites at the helm who profit from them.


Anonymous said...

Unfortunately, I believe your article is far more than "counterintuitive" to the HBR staff, to Harvard generally, and to the many who would read HBR. It is, simply put, anathema and unAmerican.

What's mine is mine.

Even pseudo-"leftist" Harvard believes in such things, and screeches and keens at the idea of anything that smacks of socialism -- unless, of course, it is the type of socialism by which Federal taxpayer dollars subsidize the expenses of any corporate endeavor, provide cushion against loss, and underwrite all corporate profit. In such cases, Harvard, its Business School, and the HBR would leap at the chance to adopt an otherwise socialist scheme.

Working farms and ranches throughout America used to follow this quasi-household model, and it is only the destruction of the individual farm and ranch that has taken it so quickly from national memory. Somehow I think that Mr Orlov should have a chat with Wendell Berry, and the two of them could make a fine case for the notion that Mr Orlov's article proposed. Who needs the Mighty Crimson, anyway? Surely not we Americans. We'd do fine without Harvard. Just fine.

I applaud you for submitting this idea to the HBR, Mr Orlov, and I commend you for getting as far as you did with those unctuous apologists for selfish profiteering.

Anonymous said...

I agree with "beware the company town." BUT I think there are different and better work models that would provide more jobs for more people -- try reading Matthew Fox's The Reinvention of Work, written THIRTEEN years ago.

Anonymous said...

I recently read a comment made by John Michel Greer on his blog 'The Archdruid Report' regarding the possibility that the US government's current actions of nationalizing massive amounts of debt from private sources might be a ploy of boondoggles to the rescue if in fact the US collapses or otherwise defaults on its national debt. I would like to know of the fate of the Soviet Union's foreign debt after its collapse, was it written off, passed down, something else entirely?

Anonymous said...

A nice idea, but how much interference will the thugs at IRS along with fellow thugs in Congress "let" one keep?

A friend is pharmacists in one state and they no longer hand out gift cards with a $$ value on it because the sorry state felt like they were being cheated of some piddly amount of tax revenue.

The IRS and minimum wage laws need to be abolished so employers and potential employees can sign the agreement that is good for them.

Dmitry Orlov said...

sth-thx -

Yes, consumers and individuals and voters in general have little hope of fighting off IRS and Congress. But corporations are another matter. Many corporations pay no tax at all. Even a medium-sized company can probably afford to buy a congressman or two, get lobbyists to draft them some custom legislation, and to get themselves a custom corporate welfare package. As far as "IRS and minimum wage laws need to be abolished" - welcome to Cloud-Cuckoo-Land (unless by "abolished" you mean "complained about pathetically").

Anonymous said...

have you seen the worldblu list of democratic workplaces? seems something that might be up your alley: ?

Anonymous said...

You load sixteen tons, and what do you get?
Another day older and deeper in debt.
Saint Peter, don't you call me, 'cause I can't go;
I owe my soul to the company store...