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Posted by on Feb 3rd, 2010 | no comments home title

Square peg into round hole = successful failure

Liz Hunter, a Senior Associate with RM2 Partnership, who specialise in employee share schemes, explains why employers need to re-examine their current human capital strategy to position themselves correctly for future growth.

Recall the 1995 film Apollo 13, which starred Tom Hanks as Jim Lovell. The film is among several to misquote Lovell’s famous statement, “Houston, we’ve had a problem”. The filmmaker’s purposely changed the line because the original quote made it seem that the problem had already passed. Dramatic license being the film director’s prerogative.

The Apollo 13 mission launched on April 11, 1970, two days later, while the mission was en route to the moon, a fault in the electrical system of one of the Service Module’s oxygen tanks produced an explosion which caused a loss of electrical power and failure of both oxygen tanks. The command module remained functional on its own batteries and oxygen tank, which were only designed to support the vehicle during the last hours of flight. The crew shut down the Command Module and used the Lunar Module as a “lifeboat” during the return trip to earth. Despite great hardship and against all odds the crew returned safely to Earth, and the mission was termed a “successful failure.”

Today’s managers face many daunting challenges and may indeed feel a kinship and empathy with the crew of Apollo 13, who were tasked with the seemingly impossible objective of turning a sudden catastrophe into a safe passage home with extremely limited resources and in the most testing environment.

For today’s employers, however, the problem is not passed and for many enterprises the outcome, success or failure, is still hanging in the balance. So, how do we rebuild our economy in the wake of this terrible global recession? Well, it isn’t by trying to force square pegs into round holes and keeping our fingers crossed that a bit of gaffer tape around the edges will keep it all in hanging in place. And, it certainly isn’t by thinking that a successful failure is the best outcome we should hope or plan for.

We are experiencing economically challenging times and true resources are scarce, but that is why it is all the more important for employers to ensure that they are managing their resources more efficiently. For most businesses their greatest resource is their people. At a time when many companies are automatically looking to cull their workforce to save costs, the mantra of “recruit, reward, retain” seems outmoded. From a bygone boom time when headhunters were tasked with scoping the best talent, reward consultants were primed to design attractive remuneration packages to showcase their client as being the employer of choice, and investing in keeping good people was what all good HR managers put into practice.

When recession first starts to impact a business it can actually provide a healthy, albeit unwelcome, wake-up call. Forcing owners and managers to examine their business closely and provoking new rigorous housekeeping measures to save profit margins. Ambition gets replaced by husbandry and staff costs are put under the microscope. Many employers have jumped to the conclusion that redundancy is the only option. It is certainly an option, but rarely is it the only option. Have employers modeled the costs of the redundancy exercise they are planning to undertake, the professional costs of the employment lawyers, the redundancy pay, the downtime necessitated by consultation processes and weighed this against the anticipated savings? Now, have those employers thought about the consequences of fulfilling the requirement to offer alternative employment? This, I would dare to suggest, is the beginning of the square peg to round hole problem that employers are going to find themselves managing downstream.

Restructuring and flattening corporate hierarchies will inevitably mean fewer people doing more work and more people working outside their core skills, beyond their experience and competencies. This is only going to create future problems that employers will have to address in order to get their business fit for the future when the upturn comes. Is it any wonder that the occupational health sector is forecast to grow?

The “right hire, right fit, right job and right organisation” is the objective of each job seeker, employee and employer, but for now workforces are being slashed and valuable talent is being lost or deskilled or shoe-horned into uncomfortable new positions. This simply will not give a company the right platform to succeed. I therefore foresee a lot of “successful failures” in the years ahead. Businesses that survive but that do not fulfill their potential.

Yes, perhaps there is a need to shed some of the “fat” that has amassed in the healthier times, but do not let go of those talented managers that know and understand your business and have the ability to drive growth and see your enterprise through the troubled times and then achieve maximal growth and profitability going forward. Keep the right people in the right job and if there is a need for a new role then do not be afraid to look externally to find the best person for that position not a make do and mend substitute. To achieve this employers and employees need to be open and flexible and really engage – something that we are not good at in the UK. Good employee communications is critical to maintain motivation and there are a huge suite of measures that employers should be considering at the moment as regards maximising the potential of their people. Communicating these options to the workforce is essential in getting employee buy-in and a true alignment and mutual understanding of interests.

The changes to income tax rates, NIC and allowances due to take place from April 2010 will soon be playing on the minds of MDs, FDs and HR directors all over the nation as they mull over end of year figures and financial projections for next year. With an unprecedented deficit to manage, and ultimately reduce, it’s not impossible that we have not yet heard the worst on this score. We shall see what comes in the Chancellor’s pre-budget report this autumn, but it is entirely plausible that the current tax proposals might be tweaked and that the payroll costs next year may be even higher than anticipated.

I would ask you, however, to pause before concluding that ongoing recruitment freezes and/or further job cuts are needed. Instead consider the alternatives. Salary sacrifice and flexible benefits might be worth exploring, and a share scheme is certainly one incentivised proposition. The right equity based plan enables employees to acquire shares in their employer company, either now or in the future (by way of an option) and can mean that the increase in the value of the shares is treated as capital gains and taxed at much lower rates than would apply to salary or cash bonus. At a time when the value of many businesses is suppressed due to unfavourable trading conditions, it could be that now is the best time to act as agreeing low values for private company shares now builds in maximal headroom for the value of awards that can be made, and maximises the potential for future reward return at efficient rates.

Cash is no longer king and costs must be contained, but employees will still have a “show me the money” hunger and a need to understand how any equity participation in their employer will ultimately translate to more money in their own pocket at some stage. Simply implementing an appropriate share plan is not enough. There has to be an exit strategy, managers need to be focused (by way of appropriate and targeted performance criteria in their reward arrangements) on achieving that exit. In addition, all participants need to understand the value of what they are being offered, how their personal performance impacts on the bigger picture and the ultimate benefit that could accrue to them.

If you ask employees to take a pay cut, miss a salary increment, work reduced hours or fill a role for which they do not feel adequately equipped, these can all leave lasting de-motivational scars and have a detrimental impact on performance for many years.

Where, however, employees are helped to understand that the alternative rewards being offered are a positive step that will help the business recover and grow, and where they understand how those alternative rewards translate into future cash consideration, the positive impact on business is increased as the interests of stakeholders, managers and the wider employee population are aligned. It goes without saying that any existing arrangements already in place should be reviewed to ensure that performance targets and strike prices are still meaningful and realistic and that employee communications are kept current and refreshed regularly.

Aim for success not just survival and start thinking again about the best way to invest in your people to help you achieve their full potential.

For more information on how your business can benefit from bespoke employee share scheme consultancy, visit www.rm2.co.uk or email Liz Hunter lh@rm2.co.uk