Paid Work – Long Past 65 – Can Benefit  Everyone

Thoughts on a wonderful  new book, Retirement on the Line,  by Caitrin Lynch, an anthropologist who spent 5 years exploring a small – and very profitable – manufacturing company in Boston which hires most of its workers when they’re over 65. Some of those working on the production lines are in their 80s and 90s. It’s a fascinating read which asks some very tough questions about the relationship between work, aging  and social values. This is an issue  which we avoid at our peril.

Creating Cultures That Lead to Success: Lincoln Electric, Southwest Airlines, and SAS Institute goes inside these three firms – all consistently-profitable leaders in their sectors of the economy over the long-term – to compare how their relationships with employees serve to maximize the benefits for their customers, shareholders and the workers themselves.

Prof. Klein and I spoke a few months ago about various issues I had written about in SPARK. I find the overall similarities between the three firm’s commitment to maintaining a long-term focus to be powerful evidence that the pursuit of profit simply does not have to be built on the backs of employees who are forced to share all the downside risks.

His analysis also, once again, provides convincing evidence that Lincoln Electric is not an outlier in the economy for its embrace of a no-layoff promise – because Southwest and SAS have had similar policies in play for many years. This is all about good leadership, not black magic.

Have a read.

from The Motley Fool and AOL Daily Finance (13/12/2011), written by Brian Richards:

Yesterday, Jefferies (NYSE: JEF ) announced that it is cutting 11% of its workforce amid fears that it cannot exist as an independent investment bank, Fox Business reported.

Jefferies’ management is doing a painful yet prudent thing here — in the face of uncertainty it is slashing expenses. But in an era of near-9% unemployment, it’s worth noting that there’s another way…beyond the layoff lever.

The Lincoln model
In June, I highlighted Cleveland-based Lincoln Electric (Nasdaq: LECO ) , an industrial equipment manufacturing company. Lincoln designs and develops arc-welding products and systems and remains the world’s technological leader in its industrial sector.

You can read the full story of Lincoln, but the short story is this: The company hasn’t laid anyone off for lack of work since at least the 1940s, and it offers employees generous pay and an open-door management policy. It’s not idyllic, but the Lincoln culture of trust really does work.

Frank Koller is an expert on the company, having profiled it in his excellent book Spark: How Old-Fashioned Values Drive a Twenty-First Century Corporation (which I’d recommend). Last week, Lincoln Electric had its annual bonus distribution ceremony in the cafeteria of its Cleveland headquarters.

Koller told me via email that:

• 2011 is the 78th consecutive year Lincoln Electric has made a profit.
• The total “bonus pool” of profits distributed among U.S. employees was $84.3 million (32% of pre-tax profits).
• The average bonus per employee was $30,775.
• The “bonus multiplier” was 63.75%. That is, each and every employee received a bonus equal to 63.75% of her/his base earnings.
• The average total compensation of a U.S. Lincoln Electric employee was $79,050.

And perhaps most impressively, no worker who met the firm’s performance standards was laid off for lack of work in 2011 — meaning Lincoln’s no-layoff policy has been intact since at least 1948.

The next time you find yourself nodding your head about the necessity of layoffs, think about Lincoln Electric: a rule-breaking company that’s managed to retain its workers and stay profitable over the very long run.

In a better world, words and facts would be the only things that matter in a serious discussion about the future of the country.

Sadly, in this world, the facts are that the current crop of Republican presidential candidates (backed by their senior advisors and supporters) is so dramatically distorting the meaning of two words in the English language that the future is in serious jeopardy.

Ponzi Scheme happily rolls off the tongues of Rick Perry, former Minnesota Governor Tim Pawlenty, Rush Limbaugh, University of Maryland economist Peter Morici and many others.

(I guess I should bang my head against a wall for deluding myself that they really don’t know what a Ponzi Scheme is. Of course they do.)

But let’s refresh. Here is the standard definition of this phrase in the English language.
Ponzi Scheme: “a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.” (For you keeners, here’s the SEC definition.)

The crucial word here is “fraud.” So just to be clear, let’s review what fraud means.
Fraud: “A wrongful or criminal deception intended to result in financial or personal gain.”
Now, let’s take this a little further, sticking with facts.

The Social Security Act was approved by the Congress of the United States and then signed into law by President Roosevelt on August 14, 1935. It has never been overturned by the US Supreme Court in the 76 years since then.

Who — exactly — over the past three-quarters of a century has criminally benefited from Social Security?

Social Security’s serious challenges — and there are many — derive from huge changes in the demographic makeup of the country, startling shifts in the ratio of workers to recipients, dramatic differences in the structure of the country’s economy since the 1930s, questions of appropriate contribution rates and debates over rising administration costs, among other factors.

Crime, however, ain’t one of the problems facing the system.

The real “deception” here is the craven mislabeling of Social Security as a Ponzi Scheme by so many Republicans. Their blatant distortions about Social Security are clearly — and only! — designed to result in “personal gain” for themselves during this election cycle.

Gee, doesn’t that sound like fraud?

Bleak. Desperate. Urgent. The words leap from almost every headline about the state of the American economy these days. Official unemployment is stuck north of 9%, while the effective rate is likely above 16%. Millions of people are suffering.

Meanwhile, businesses of all sizes are sitting on mountains of cash, reluctant to hire workers — even those laid off in the past three years — because they expect things are going to get worse. Corporate leaders say they want to protect employees, but it’s hard for most Americans to believe a CEO who argues that “we’re all in this together.”

There was a time in American history when a few firms — some, very big — tried, and often succeeded, in living by the creed that it is possible to protect people as well as profits.

The Rise of Welfare Capitalism

From the last two decades of the 19th century to the start of World War II, “welfare capitalism” was part of this country’s economic landscape. There was never a precise definition of what welfare capitalism comprised. But starting around 1880, some business leaders came to the conclusion that the incredible level of strife inside their companies — perpetual, sometimes violent, war between workers and management — was just too inefficient to continue. Endless strikes, employee turnover rates of 200% to 300% a year — neither side was coming out a winner.

Gradually, a few companies began to reshape day-to-day operations to improve both working conditions and the size of weekly pay packets in the hope that employees might see it in their interest to reciprocate by working more productively.

It’s also undeniable that many of these employers hoped to convince their workers that unions (then in the ascendency, terrifying most owners) were unnecessary. Coercive? Sometimes yes.

Harvard historian Lizabeth Cohen identified five basic elements of welfare capitalism:

1. A desire to improve workplace relations.
2. Financial incentives to raise productivity.
3. Experiments with shop-floor democracy (as long as it didn’t include unions).
4. Programs to help the lives of employees outside of work.
5. Shouldering greater civic responsibilities.

And of course, the prime directive: to make as much profit as possible over the long term.

Who Were Welfare Capitalist Firms?

Some of the biggest names in the country embraced many of the basic principles, including Kodak (EK), Sears Roebuck, Procter & Gamble (PG), and General Electric (GE). None were perfect employers, some bent the concepts to favor management, others intruded into the private lives of employees, but overall, the idea that a company could and should provide some degree of security for its workers — even for self-interested financial reasons — became fairly commonplace.

These companies were generally both profitable and innovative. Workers weren’t necessarily whistling happily as they trudged onto the factory floor each morning, but the basic employment bargain — work hard in return for a decent, secure wage — seemed fair to many.

John Commons, the economist often regarded as the “spiritual father” of the New Deal, said the best welfare-capitalist firms were “so far ahead of the game that trade unions cannot touch them. … Conditions are better, wages are better, security is better than unions can deliver.”

The Decline of a Good Idea

Sadly, during the Great Depression, most welfare-capitalist firms abandoned the key elements in order to survive.

“Was that inevitable?” has been a rich topic for debate by scholars ever since, with some arguing that welfare capitalism was simply too new to weather such a storm, while others claim that the increased security offered to workers was inherently too costly.

Some did survive, of course, evolving with the times, like the privately held S.C. Johnson, the huge maker of household cleaning products. Cleveland’s Lincoln Electric (LECO), one of the most successful manufacturing firms in the country, has retained its technological leadership and profitability over the past 100 years while avoiding layoffs for nearly three-quarters of a century and paying wages that have consistently exceeded the industry average.

Nearly 30 years ago, Harvard economist Martin Weitzman wrote The Share Economy, in which he argued that if significantly more firms shared profits with their employees, it would go a long way to ensuring a much more stable national economy — to the mutual benefit of workers, investors, and the country as a whole. The New York Times called the book “the most important contribution to economic thought since Keynes.”

Still About the Bottom Line

More recently, the concept of shared capitalism, drawing on the insights and research of leading economists such as Richard Freeman and Doug Kruse, has been receiving increased public attention. (A major challenge, understandably, is developing the mutual sense of trust that short-term sacrifices are worth the pain for long-term gains.)

None of these ideas for running a successful business in America — from welfare capitalism to shared capitalism — are based on altruism. That’s a nonstarter in this economy (bemoan that as you wish).

But surely it’s time to revisit the idea that a corporation can remain highly profitable over the long term by providing a floor of economic security for its employees — given that far too many American employers are doing neither.

The script for a layoff announcement in America these days is numbingly predictable, whether delivered by email or live at a beleaguered head office: The CEO reviews the tough economic landscape facing the firm, promises that “our employees will remain our most valued asset,” then announces that 10% or 15% or more of the workers will be let go while claiming that “I had no other option.”

Given the financial and emotional carnage that layoffs have inflicted during the Great Recession — on workers, their families, communities, the whole country — it would be reassuring to know two things: first, that those CEOs could justify exactly how a layoff was going to forestall impending economic disaster; and, second, that they really had explored all their options.

Sadly, there is little evidence that either of those things take place in most boardrooms across America.

The Alleged Efficiency of Layoffs

There are legitimate alternatives to layoffs. Consider Cleveland-based Lincoln Electric (LECO) — a company that has not given a single employee a permanent pink slip for economic reasons since 1948. Lincoln found other ways to go lean, like reducing hours, instituting hiring freezes, and offering early retirement incentives to volunteers.

Lincoln’s no-layoff policy is the outlier in corporate America. It shouldn’t be.

Evidence is mounting that layoffs represent an extraordinarily risky and costly business strategy. Far too few executives are aware of what they unleash on their own firm when they downsize or rationalize (or whatever other antiseptic euphemism they have for destroying people’s lives).

Peter Cappelli — from the University of Pennsylvania’s Wharton School, and a leading expert on layoffs — is depressingly blunt about the layoff thought process used by the majority of CEOs in America: He says most have absolutely no idea if cutting employees is a good strategy.

“They don’t have a systematic way to assess what is the net present value of the decision whether or not to lay people off,” he says. Yet these same executives can make detailed calculations for virtually every other decision that comes across their desks.

The Real Cost of Pulling the Layoff Lever

Given the apparent ease with which those running U.S. businesses have been pulling the layoff lever, we should demand that they think more rigorously — and much further ahead — about these issues than they do now.

CEOs should start by examining the actual costs of reducing headcount in tough times. Calculating the impact of a layoff on the morale of those who survive is hard, but not impossible.

Increasingly, research demonstrates that the stress on those left to pick up the slack leads to higher costs in the long run. The survivors wonder, “Am I next?”; instead of waiting for the answer, they head for the exits. It’s not uncommon that, for every worker formally laid off, up to five more voluntarily decide to leave within a year.

And what happens when business starts to pick up again? Employers find themselves understaffed — and scrambling to survive. The costly race to recruit and hire replacements can easily wipe out the expected savings used to justify the initial layoff.

Employee morale isn’t all that suffers when workers are let go. When remaining workers live in fear for their jobs, does anyone rationally expect the quality of production not to deteriorate?

It happened to Caterpillar (CAT) in the 1990s, when the company endured near-continuous labor strife. Caterpillar’s customers (and who counts more?) consistently rated the quality of the firm’s tractors and heavy equipment produced in those years as significantly lower than normal.

The cost of that loss of confidence is estimated to have been nearly half a billion dollars — and that’s not the kind of money shareholders can just let slide.

Who Really Makes Money When Heads Roll?

“A layoff will protect our stock valuation” is one of the perverse justifications CEOs use when trotting out their plans to shareholders and analysts. Yet, increasingly, research shows that it’s simply untrue.

A study by Bain and Company found that while very small layoffs may have little effect on share value, a public company that slashes 10% or more of its workforce — and that’s not rare! — will see its stock drop nearly 40% in value, and that it may take years to recover. (Take note, Research In Motion (RIMM) shareholders — the BlackBerry maker cut 10.5% of its workforce this summer.)

Another global review of the effect of layoffs on stock valuations is equally grim: “[L]ayoff announcements have an overall negative effect on stock prices … whatever the country, the time period or the type of firm considered.”

So, we know layoffs are horrible for those who lose their jobs. And we also know that cutting workers doesn’t reward shareholders. So who wins when heads roll? You probably won’t be shocked at the answer to that question.

Cut Headcount, Boost Paycheck

Researchers at the University of Arkansas tracked the earnings of executives at major U.S. corporations who ordered 229 layoffs during the 1990s. A year after the layoff, average total CEO compensation was up 23%!

Granted, the ’90s was a decade of growth. Now, however, the growing chasm between bloated CEO earnings and poor corporate performance (which clearly includes ordering a layoff) is fueling widespread public suspicion that far too many compensation systems are badly skewed in favor of those at the top. (Check out William Lazonick’s work on this issue.)

Lacking convincing evidence that layoffs represent an effective long-term business strategy — even in emergencies — it’s time to get much tougher on corporate leaders who claim that they have no other option.

Last weekend’s shenanigans in Washington should have you convinced that the inmates have now taken control of the asylum. This surrender to the Tea Party means more cuts to the very social services so badly needed by the more than 14 million Americans who are unemployed and by their families. And that’s just the first step on the downward slope to follow.

But if you need any more convincing that something is going terribly wrong in the economy, here’s a very quick look at three other signposts which appeared this week.

1. The New York Times‘ Steven Davidoff wrote a fascinating article about what has happened to the corporate directors of Enron in the years since that company collapsed in 2001. Far too few reporters do this kind of reporting — going back to a story that once dominated the headlines but has since faded from the limelight. (I’ve been a journalist for nearly thirty years myself.)

His conclusion is blunt and depressing: “Do the former directors of the institutions that collapsed during the [recent] financial crisis have anything to worry about? If the experience of Enron is any example, the answer is a resounding no.”

Davidoff looks at where the folks who were responsible for the oversight of Enron have ended up and the public record shows that they’ve “recovered nicely from the scandal.”

In the light of what’s happened over the past three years on Wall Street, Davidoff’s analysis of corporate responsibility — and culpability — leads him to conclude that we’re deluding ourselves to expect improvement in behavior from the financial markets.

“The trend also underscores the decline in the importance of reputation on Wall Street — even since the time of Enron. Prior bad conduct simply is often not viewed as a problem.”

2. On Monday, the National Bureau of Economic Research published a new paper by two academics who examined the connections between companies that find themselves in public trouble and their subsequent investments to burnish their public image.

“Corporate Social Responsibility for Irresponsibility” (PDF) is based on the analysis of a 15-year record of behavior by roughly 3,000 publicly traded American companies of all kinds.

Their conclusion: “When companies do more harm, they also do more good.”

I suppose you could twist yourself into an elaborate knot to argue that there is a silver lining in that statement, but in the light of how little responsibility those at the top take for their corporate misadventures (see 1. above), the authors added a kicker.

It turns out that when companies find themselves in hot water because of growing public concerns regarding some aspect of their corporate governance, their response is to invest, consistently, in “corporate social responsibility [programs] in other dimensions, rather than reform governance itself.”

In other words, they avoid dealing with the fundamental problems at the top. Surprised?

3. Finally, I was involved in a very interesting blog discussion this week about recent writing I’ve done about very successful American companies that promise their employees that as long as they work hard, they will never be laid off.

It’s not an easy management style to embrace in any economic climate, all the more so in these slash-and-burn times. There are many challenges — and some dangers — in bucking conventional economic wisdom. Yet firms such as Lincoln Electric, Hypertherm and Southeastern Freight Lines have honored these promises for many decades while remaining exceedingly profitable and innovative.

You’d think that with so much financial and personal devastation in the news, there might be a sense of enthusiasm for at least exploring how and why these firms operate year-after-year.

I was struck by exactly the opposite conclusion of many of the comments, including senior academics from the MBA world.

To wit: “I don’t think a recession is the right time to be encouraging firms to retain workers. What the economy needs most is deleveraging and restructuring across sectors… in a dynamic, growing, innovative economy, we want entrepreneurs to be able to direct resources (including labor) to their highest-valued uses, in response to changes in consumer demands, technology, etc.”

So there you have it.

A lack of responsibility from those in power… spending money to put lipstick on a pig… and once again, downplaying the terrible jobs crisis.

Doesn’t encourage much hope, does it?

Let’s put together some recent data and academic research on inequality in America.

First, according to this week’s census report, the gap between rich and poor is steadily growing wider. You can cut it any number of ways, and there has been lots of number crunching in recent days, but here’s the official verdict from the Census Department: the gap between the top 20 per cent of Americans and the bottom 20 per cent has nearly doubled since 1968.

That top fifth of Americans now earns half of all the income generated in the country, while the bottom fifth earns only three per cent of that amount. The top five per cent of Americans alone earns one-out-of-every-five dollars paid out as income.

(Does it really make this issue of unequal distribution less worrisome to remind us that the situation was worse in 1929 – just before the Great Depression – as some conservative voices are doing?)

Second, Americans are woefully unaware of how unequal the country actually is in terms of income earned. Dan Ariely (author of Predictably Irrational) and Michael Norton have just published a survey demonstrating that Americans of all persuasions – Republicans, Democrats, men, women, well-off, poor – significantly underestimate how amazingly rich the richest Americans actually are.

Even more intriguing is that those same Americans are adamant that they want to live in a country where wealth and incomes are much more equally distributed, because it seems to them to be strong evidence of a much fairer society at play. In fact, in a blind choice between living in a more egalitarian society based on income (Sweden) and the US, they picked Sweden over the US by an overwhelming majority.

Third , this week, along comes a new study by another group of prominent economists (that includes Emmanuel Saez, widely-acknowledged as a leading expert on income and wealth distribution in the US) demonstrating the extent to which, as humans, we simply don’t like income inequality.

The researchers surveyed the reactions of more than 6,000 employees of the sprawling state-wide University of California system upon learning exactly what each and every one of their colleagues is earning. (Starting in 2008, the pay of every state employee in California is posted on an open website.)

In a nutshell – and why would you or I feel different? – it turns out that knowing that we are making less money than our co-workers makes us unhappy about our jobs, more likely to look for work elsewhere, more worried about the inherent fairness of our workplace and of our society in general and ultimately, that affects how we vote.

In other words, understanding how unequal the country has become can be really important in electoral politics.

The problem right now, of course, is that neither political party is much interested in talking about inequality.

For Republicans, talking about inequality raises the danger that, almost regardless of how it’s spun, voters will realize that the rich are steadily getting richer. Or more precisely, that a relatively fewer rich Americans are getting a great deal richer than the vast majority. Why should Republicans initiate a discussion about something that just makes voters demand, because it’s the only option, increasing taxes for those at the top? Republicans don’t do that!

For Democrats, talking about inequality requires talking about … wait for it! … raising taxes and cutting spending, because in the dire economic situation the US now finds itself in, once again, there really isn’t a way to avoid this hard prescription. And it’s become party dogma that Democrats don’t do that!

As a result, both political parties have a short-term interest in simply avoiding making too much of the fact that America is becoming a more and more unequal society, where more and more Americans are struggling to live decent lives.

Does that sound like good leadership to you?

Till gave the Committee an in-depth analysis of the substantial and long-lasting effects of layoffs on workers and their families, arguing that while there are “cost-effective policies” to get the unemployed back into the labor market, finding ways to reduce their significant earnings losses over the long-term represents a much bigger challenge – and as a result, the greatest priority (for policymakers as well as employers) is to develop “preventative measures to avoid large-scale layoffs in future recessions.”

One of those preventative measures – admittedly not possible in every situation – is for more employers to finally stop repeating their all-too-often-ignored platitudes that “our employees are our most important asset” – until a recession hits and reaching for the layoff-lever just seems so easy.  Companies such as Lincoln Electric actually find that in those unavoidable tough times, keeping people at work generates a powerful competitive advantage.