The Intersection of Politics and Business

The level of shock and pain experienced by the public during the recent downturn has led to a political environment that is unwilling to defend valid business actions. The desire to find someone to punish for the downturn has led to actions that are threatening the rule of law.

The recent attempts to punish AIG and its execs as an egregious example of pay for failure, misses the point that the retention contracts (however large and misguided) are rational business practices and contractually valid methods of securing the continuing services of key staff during the wind down of a business. If these staff were not retained the likely result would have been even greater losses as the business was unwound.

The carryover political fallout has others reviewing their incentive plans and compensation designs with an eye focused primarily on the political optics rather than the business purpose. Questions are arising whether Boards' should exercise their discretion to reduce payouts that would otherwise occur based on superior relative performance.

Its always been politically difficult to payout incentives when the performance is based on mitigating losses relative to peers rather than solely on making money, but it is precisely this protection on the downside that requires the most foresight and talent. While it would certainly have been preferable in the first instance to have introduced risk mitigating incentives into plan designs, choosing to reduce or eliminate incentives that mitigate risk through retention of key staff or awards for superior relative performance leads in the wrong direction.

A further concern is that these actions create an environment in which valid contracts are not honored thereby denigrating the rule of law. The congressional passage of an after the fact tax aimed at contractually valid bonuses further subverts the basic foundations of business.

Focus on Today or Tomorrow?

Despite the distracting global economic woes and the sideshow in Washington and on Wall Street, most of the inquiries I am receiving are from business colleagues who are focusing on basic day to day challenges and the occasional merger or spin-out. Reduced staffing levels and desire to provide immediate value are focusing attention primarily on short and mid-term questions. I am not hearing as much long-term and that I think reflects the state of the economy. So what am I hearing and what isn't being asked?

On the short-term side the questions are:

• How do I cut costs without cutting people?


• Should I use furloughs or salary reductions?


• Should I assume I won't pay bonuses this year?


• Should I cut all at once and hope that it will be sufficient or should I engage in a pattern of small cuts that eventually becomes a way of doing business where I am regularly taking out the lowest performers?


• How can I reduce health care spending now?


• What is the right severance plan today and what are the optics?


• How do the reduced costs of housing and fuel allow me to relocate or lock in people that I need?


• What are the compliance impacts of the regulatory changes that are occurring?

On the mid-term side the questions are:

• Can we change our business model to provide services more efficiently?


• Can we afford an investment in technology today that will provide a quick return within 18 months?


• How can I quickly get more productivity out of a shrinking workforce?


• What is the right revenue per employee number and how does that effect my staffing needs and cost reduction plans?


• How can I keep people engaged in the right behaviors to drive productivity and performance?

From a small number of forward thinking organizations I am hearing questions about the long-term strategic shifts that the future will bring.

• What is our people strategy? Should we revamp our long-term thinking based on current realities. What is the future going to be like? Is this a fundamental restructuring of the business landscape such that we will no longer be in some businesses and therefore won't need the types of workers we employed previously?


• How does this economy impact our workforce planning scenarios? Should we assume that boomers will all defer retirement? What are the career implications for our younger mid-level talent? What are their prospects for promotion and career development? What is the risk of unexpected turnover as a result once the economy rebounds?


• Should we investment in systems changes today that will position us to operate with a different customer service model in the future?


• Should we be doing scenario planning for our business models and human capital needs much as we would for our financial and physical assets? Does scenario planning have any useful shelf life?

Given these unasked questions, can we afford to stay focused on the day-today demands of our jobs or does our viability depend more on our ability to address the needs of tomorrow?

Communication and Engagement

We have heard the refrain from money mangers that the stock market leads the economy by 6 to 12 months. A turnaround in business will be preceded by significant upward market movements. The absence of such movements suggests that a recovery is at best likely to occur at the end of calendar 2009. Employers heading into budget planning for calendar or fiscal 2010 are likely to be looking past significant additional headcount reductions to other means of cost management designed to position them for recovery and future success.

A recent Watson Wyatt survey of 245 large US-based companies attracted attention recently by reporting that despite 61% of participants thinking a recession would continue for the balance of this calendar year, the number of companies planning future headcount reductions dropped to 13 percent (fully 10 percentage points below the number predicting cuts in December). In part this reflects the quick triggers of managers in reducing headcount (especially variable headcount) along with the limited availability of excess staff to reduce.

Instead managers are actively looking at reducing costs including salaries, raises, incentive pool funding, retirement contributions and working hours. In addition the pressure to transfer increasing health care costs to employees is significant and will doubtless play a role in the President Obama's health care debate.

The challenge with any of these actions is to find a way to implement the cost reductions while insuring continued engagement of employees. Employers who oversee an engaged workforce are much more likely to emerge in a strong competitive position. The efforts being made across the board to hold onto critical talent speaks volumes about the degree to which employers now understand that their human assets are their most important assets.

Unfortunately too few employers have translated their understanding into communications that have an impact on engagement. Often as not employees are heard to say we will accept these cuts because we feel lucky to have a job rather than identifying how the cuts and their job performance tie to the success of their companies. This lack of connection not only makes them vulnerable to poaching when the turnaround begins but also highlights the missed opportunity associated with a lack of appreciation of the drivers of economic performance for their employer and themselves.

Now is the time to begin communicating and educating employees on the key drivers of business success and how they play a role in guaranteeing company performance and their own future. Communication provides an opportunity to make the link explicit and to derive the rewards from the enhanced line of sight.

Skills vs Training the Path Forward

An interesting New York Times article today addressing the downturn in admissions to and matriculations from liberal arts based college programs raised several important questions that impact hiring managers. Are nonspecific educational programs that emphasize critical thinking, information synthesis and historical context relevant in an increasingly technological and regulatory compliance-oriented buisness environment? What would you prefer to hire as an analsyt working for you - a techician with deep training or a smart critical thinker? These questions are especially important for managers trying to position their organizations for success in and after a downturn.

It is inevitable that students will gravitate, especially during a downturn, toward degrees that give them a leg up in the hiring process. Students will also follow the money, which has been flowing away from Wall Street recently, toward more stable career choices.

Even in a seemingly broad-based and non-technical field like human resources management; we have seen the emergence of certification programs designed to train new entrants into the field along with the continuing importance and strength of continuing professional education. If presented with two candidates one with a certificate and one without, most managers are likely to go with the certificated hire. Notwithstanding the pre-hire training aspects, the true value of the certificate may lie in the indication that the candidate is truly interested in the area of work and willing to make a longer term commitment to learning and development. The certificate highlights not the end of the learning journey but simply the beginning.

If carried to its logical extension the programs could yield a workforce that is too narrowly trained and not capable of conducting the broader and more challenging synthesis across disciplines that yields innovation in development and in problem solving. As we conduct opportunity hires and reduce existing headcount the challenge will be to avoid purging the exact but elusive qualities we will need to successfully meet the challenge of the future.

Furloughs and Pay Cuts

As the financial strains stretches on employers are increasingly taking action to save cash. Many have chosen to cut headcount early and often, this is especially so in the service industries. Others who were not dependent on large numbers of people to fuel their growth out of the last downturn had contributed to what was then referred to as the jobless recovery. The result is an inability to reduce headcount enough to achieve profitability without severely injuring the fabric of the organization and hindering recovery.

So what to do? Current practices have focused on freezing and reducing salaries across the board starting at the top to reducing the number of days worked (furloughs). Reducing salaries can work for the short run as long as senior management is seen to be sharing the pain in the form of larger percentage cuts and no bonuses.

Furloughs have been used frequently in manufacturing environments including high tech for years (think the last two weeks of the calendar year). They are now being actively used in government and other entities (especially unionized) where it is difficult to implement headcount reductions or changes to the pay system.

The challenge to both approaches is to identify an exit strategy. The strategy needs to go beyond when to reinstate but how to do so. Early communication of the exit plan will go a long way to improve morale and drive performance.

Discipline and Process

The key elements to consistency are discipline and process. Process provides a framework and discipline provides the follow through. Consistency, as I am acutely aware, as a new blog author is a significant part of the formula for success in writing a blog. Consistency is also a significant part of the formula for avoiding issues that might be identified as "unnecessary or excessive risk taking." These terms as applied to a certification requirement for participants in the TARP capital infusion program aren't defined. HR, legal and risk managers have little choice but do craft a rational process from whole cloth that will provide a basis for certification. The first step is to establish a disciplined process for review of the incentive program to insure that intended or unintended consequences are not excessively risky.

The old adage in incentive design "be careful what you ask for because with incentives driving behavior you will get it"; now carries the risk of noncompliance with a federal mandate associated with use of government funds. This small wake up call is a good reminder about the importance of process and identification of risk potential in incentive design whether or not TARP funding is involved.

Relying on competitive information about program design won't be sufficient. A process needs to be in place that includes a disciplined review and documentation of an analysis of the rationale for the program design. Anticipated outcomes and risk mitigation factors should be clearly identified. The challenge as always will be one of balance - sufficient incentive to promote entrepreneurial risk taking moderated by incentives designed to protect shareholders and the enterprise from significant negative consequences. After all that is exactly what shareholders are expecting of management.

Welcome to 2009

The beginning of the new year is often followed by a review of the past and a projection of good intentions (less committed than resolutions) for the coming year. Almost everyone I have spoken to recently would rather forget 2008. However failure to learn from history dooms us to repeating it. A bit like Ground Hog Day.

We should by now be able to recognize:
- market bubbles and gold rushes
- the value of regular pruning of both our portfolios and our staffing
- the need to balance hesitation with action as the foundation to good management
- the importance of being hard on issues but soft on people if we want to retain our best talent
- the ongoing importance of ethics, governance and operating excellence
- the value of showing up and doing a good job
- the value of diversification even when it simply mitigates losses
- and oh yes the value of risk management.

Not withstanding these cautionary intentions we need to relentlessly focus on:
- our customers, clients and relationships
- innovating as the means to achieving highest form of competitive advantage
- building trust and mutual respect between teams and with clients
- taking personal risks to achieve long term goals
- fearing lack of success more than risk of failure.

With these intentions as a backdrop as I learned in college there is always Hope.