Tuesday, 21 January 2014

Before the next one hits...

As we begin to emerge from the second worst economic downturn in the last century, I submit that we need to rethink our response to the next time we are faced with a recession.  I don't know when that will come but history clearly demonstrates that it is the very nature of our world financial systems to experience periods of growth followed by 'corrections' that we call recessions or, in their worst iterations, depressions.

Those in leadership roles at publicly traded companies have followed a fairly predicable path to respond to these downturns.  They may cloak it in different terms such as 'restructuring'; 'rightsizing'; 'workforce adjustment' or some other euphemism. But the bottom line is the same.  They fire a lot of people and force the remaining employees to be more productive with fewer resources. 

This approach is done, first and foremost, to satisfy other stakeholders, most specifically those who own shares of the company.  Demonstrating to 'the street' that you are being proactive in responding to an economic downturn somehow suggests that the executives know what they are doing and thereby expect to retain the trust and confidence that first gained them the positions they hold.

I have been around long enough to have worked through several recessions.  Since 1950 there have been 8-10 recessions. ( Some commentators combined some events, hence the difference.)

The fallacy with the traditional response is that most recessions are short-lived, the current event notwithstanding.  What that means is that more often than not, the impacts of layoffs have only just subsided when it comes time to fill the vacancies to meet returning demand. 

Here is the truth.  Layoffs and the associated severance costs are incurred in a year in which profits are already going to miss budget.  These costs cloud the underlying reasons that objectives are not being met- that is poor planning and/or execution at a leadership level- and they allow for executive management to mask overall results. 

The following year it becomes a relatively easy matter to exceed prior year results and to show 'double digit growth' and thereby restore shareholder and market confidence.  The corner office is able to polish its' 'messiah complex' while never acknowledging that they should have been managing the company with the knowledge that a downturn was inevitable.

This charade comes with a huge human cost that in many, if not most, instances is entirely unnecessary.  So here are my recommendations for what ought to occur in the face of the next recession...because there will be a 'next'.  These all must be implemented before any layoffs are contemplated or initiated.
  1. All bonuses are immediately suspended.  In my opinion, when the alternative is for someone to lose their job it is better to cut out bonuses for those whose strategic plans and lack of execution have put the company in the position that requires these discussions.
  2. The company should determine the actual amount of savings that are anticipated from the terminations. Instead of layoffs there should be salary rollbacks on a sliding scale starting at the most senior levels.  Executives at the CEO and VP levels should be cut 10%; next level managers 7.5% and mid level managers 5%.  If these cuts have not achieved the dollar objective, then the balance needs to be shared amongst the remaining staff.  In all likelihood it would be a 2-3%  rollback which, after taxes, represents a negligible reduction in actual take home pay.
  3. An option to a salary rollback would be job sharing or reduced hours.  For example, someone can contribute a 2% reduction in compensation by working about half a day per month less.  Most people would be able to accommodate that kind of change.
Adopting this kind of approach to recessionary pressures has several benefits, some of which include the following:

  1. The reduction in bonuses hits those whose failures have had the most significant impact in the company performance.  At the same time it affects those who are most capable of withstanding the financial impact.  Very few executives are young and fiscally vulnerable.  They don't have mortgages and loans that stretch the family budget to the extreme.  The failure to collect a bonus translates into one less European vacation or a delay of a year before they replace that BMW in the driveway.
  2. When everyone participates in the pain, there is a greater sense of community in the workplace.  If everyone is considered to be part of the solution, then respect and commitment to the cause is improved because the objective is the same for everyone...to restore the company to the levels of profitability that allow wages to be recovered.
  3. Whenever layoffs occur in a company, those who remain work under a cloud of guilt  and  they grieve for friends and co-workers who have gone.  Furthermore they tend to have a 'whose next' kind of attitude and their work reflects this defensive posture.  If this guilt and grief can instead be replaced by gratitude and joy, how much more positive will the effort be to face the challenges ahead. 
  4. Finally,  this approach recognizes that the true stakeholders are not the pension plans, fund managers and analysts who hold and/or rate the stock value.  Rather, the employees have the greatest stake in the company and their futures are more important that any other.  As such, the pain should first be felt by the ownership group for they are the ones who have appointed and supported the executive team and they should share in the failure in the way that really hurts, in their wallets. 

A front page report today stated that the top 85 billionaires in the world have a combined wealth equal to that of half of the world's population.   Talk about a concentration of wealth.  This represents the extreme but symbolically it also illustrates the issue that I have referenced above. 

A relative few at the top are making decisions, at times poorly, but the consequences of those decisions primarily impact others.  Next time around why not have a protocol in place that anticipates the need for short term adjustments that will impact those most responsible for the predicament.  Perhaps the recognition that this protocol exists will be the impetus for this group to make fundamentally better decisions that demonstrate an understanding that business cycles truly exist and that corporations should be built with this expectation in mind. 

Or is that just too much to ask...



  1. Jim, you hit the nail on the head! Great article!!

  2. Hi Jim

    This is a very good post this week.

    Accountability must be spread out with anticipation of highly predictable cycles that are bound to repeat.

    It should be the leader who smooths performance over an extended period of time who is rewarded - not the steward who allows the limited few to ride the roller coaster of growth/decline to their financial success. Jim Collins has this leader well defined in any of his books.

    The current job market is unlike anything I have seen in 20 years - and I joined the workforce in 1990 in the post 80's recession. The housing bust in Toronto and high interest rates (people left holding the bag on undervalued assets at crippling mortgage rates) affected people's overall wealth, but unemployment stats seemed more reliable.

    In the early nineties, the recessionary cycle played out without a sustained freeze on hiring (although we had another recession in the decade) and managed to get back on track.

    I watch today as highly competent and successful director level and above leaders accept lesser roles or stay on the sidelines when we need their leadership more than ever. My immediate network includes 8-10 people who if I was building a company, would be on my team immediately.

    Something needs to give and allow for my generation and the one after mine to participate in a true post recession recovery. A recovery that as of 2014 has shown no signs of appearing.