Consider the consequences of cost-reduction strategies

Posted on Written by Jerald F. Robinson
Jerald F. Robinson

George and Ira Gershwin and DuBose Heyward provided a perfect description for the setting of the 1935 opera “Porgy and Bess” with their hit song “Summertime.”

The week of July 4 was commonly time off for workers. Plants closed for a week or even two and some for a month. Some workers got paid vacations, but the majority did not.

It was a time for picnics on the lawn under big tree canopies, with iced tea and lemonade. Hot dogs, hamburgers and fried chicken, along with cold watermelon, seemed to suggest “the livin’ is easy,” as the “Summertime” lyrics proclaim.

If a beach or lake was handy, trips could be planned. Swimming, canoeing and rowboating could provide the sense that life was easy, but it was not.

The 1930s were the Depression era. Many people were out of work. Everything that could befall a family with an unemployed breadwinner did. The president and Congress worked together to develop what we now call the safety net or “entitlements,” depending on your perspective. Public spending was a positive element in economic growth. Military spending (World War II) was a final positive element. This was in keeping with the new economic theory of John Maynard Keynes.

Since 1935, we have been through several recessions, and we have always used the Keynesian theory as the basis of our fiscal policy. Employee rights and benefits have grown. Productivity has increased significantly because of a combination of technology and a more dedicated and trained work force.

Management has capitalized on developing behavioral theories and has been able to motivate employees, despite the ups and downs of the economy. A national work culture has developed. Blue-collar and middle-class incomes have risen significantly. Shared workplace governance and shared productivity efforts have been developing in some sectors, with unique bonus systems.

Summertime also has changed in the past 80 years. Many consumers have found the water to be a recreational attraction. Boating has become a highly desirable pastime, and sales have increased in the middle-income and blue-collar sectors.

More beach and lake vacations and long weekends are not unusual. Summers are hotter now, and there are fewer family picnics or families have become more dispersed and summers emphasize more summer camps for the kids — urban or suburban. Cruise travel is up (in spite of recent cruise ship problems); travel has become more affordable overall. IRS data suggest that vacation homes are on the rise.

Small firms, lower benefits

So what is on the radar for managers in the summer of 2013 and beyond? Having recently participated in roundtable discussions with business leaders and academicians about the workplace of the future, let me share some crystal-ball possibilities. “Politics in action” is on the verge of affecting many aspects of the U.S. workplace, and these changes may well affect you as a manager. Stupid, you say? Nothing will really change, you believe? It’s only a lot of political posturing? Let me review some possibilities that go beyond the proposed dismantling of the safety nets.

Beginning in the Reagan years, job growth has been most rapid in smaller businesses. Employment at large manufacturers has been declining. During the election campaigns of 2012, small businesses were often labeled “job creators.” A series of significant impacts is created, with job distribution shifting from large corporations to small businesses (and not just the mom-and-pop shops.)

The evolved workplace of a typical large corporation has provided many of the “taken for granted” supports for employees: paid sick leave (commonly 3 to 14 days) and paid vacation (commonly 1 to 4 weeks), both of the above after a 90- to 180-day probation period; in-house training opportunities; flex time; partial or full support for group health insurance; some variety of retirement program (either a traditional benefit plan or a 401(k) plan); advancement/ promotion ladders; production bonuses; tuition reimbursement; in-house child care programs; employee assistance program; severance pay; and likely others in unique situations, especially at high-tech firms.

If we compare this “corporate” model with the “job creators” model, we find a stark contrast. Rarely have small businesses, excluding the technology sector, offered the range of typically “taken for granted” benefits to employees. Small businesses were initially literally small entrepreneurial operations run by the owner, often with only family members.

The entrepreneur and owner likely had minimal financial backing beyond the family’s personal funds. Costs were kept as low as possible. Family members, as employees, do not fall under government workplace regulations. As the truly small businesses would grow, employees often would be hired on a part-time basis and at relatively low pay. Such employees would receive few if any of the “taken for granted” benefits in the corporate model. In some instances the small business would pay “off the books,” allowing employees to pay no taxes and lessening the tax burden for the business. Today the size range for small businesses is wide and often reaches hundreds of employees.

The health care law

Now add to today’s environment the Affordable Care Act. It is restructuring the health insurance market, and in so doing seems to be causing unintended consequences for small-business employees, many of whom often already work part time. Many employers are reportedly cutting weekly hours below 30 to avoid being required to provide health insurance for employees. Some workers are losing coverage they previously received.

Workers will not have insurance, and subsequently they will face a federal penalty for failing to have it. The same thing is happening in many state and local governments. What unintended consequences might there be for businesses? What actions might workers take when they feel the greater inequity? Are there other trends that might trigger similar reactions?

The main area for possible concern for all employers — all managers — deals with the possible unintended consequences of strategies being developed to deal not just with the Affordable Care Act, but also with other cost cutting of employee benefits or “taken for granted” benefits, referred to above.

Based on professional association surveys and interviews with managers and employees, these changes are slowly taking place as cost-cutting approaches to lower labor costs. Larger firms are beginning to duplicate more behaviors of the smaller firms: reduced tuition reimbursement programs, less sick leave, a reduction in vacation/annual leave programs, reduced or eliminated training programs, a reduction or elimination of retirement programs and the elimination of any program that does not show a direct benefit to production.

If pay and benefits decline

For more than 60 years, managers have been intrigued about how to get more production from a given work force. A multitude of motivational theories have guided managerial strategies, some successful and others less so.

One of the best-known theories is that of Abraham Maslow. Perhaps it should be reviewed by those developing cost-reduction strategies. Recall the hierarchy of needs; efforts were always to go up the hierarchy to be able to have humans properly motivated by current-day techniques. The later work by Frederick Herzberg vividly showed that only when the “hygiene” needs (largely money and benefits) were satisfied could the “motivation” variables be utilized effectively.

All of the popular theories of motivation have assumed that the money and workplace benefits would improve and then motivation would be possible. But what if money and benefits instead decline? What will be the natural human reactions? Would these reactions be at the company level or wider? Looking at other industrialized nations, we can see some worst-case scenarios. What can you do then at your company level to be alert?

A doctor would refer you to a surgeon only as a last resort. A surgeon would say to use a scalpel and not a butcher knife. A consultant might tell you to consider the unintended consequences of cost-reduction strategies as they affect existing pay practices and benefit programs.

Do what your considered judgment causes you to do, but recognize that some strategies may be more costly in the long run. Now you can be angry that I would dare suggest such thoughts or you can start a dialogue among leaders as to how better to improve strategies in your own company and not wander out on the slippery slope of significant uncertainty.

Jerald F. Robinson, Ph.D., is professor emeritus of international management at the Pamplin College of Virginia Tech in Blacksburg, Va. He can be reached at (540) 449-5870 or by e-mail: JFR@vt.edu.

This article originally appeared in the July 2013 issue.

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Comments

One comment on “Consider the consequences of cost-reduction strategies

  1. zyxw

    This article hits the nail on the head. With middle class incomes stagnant or declining, reduced benefits, and longer working hours it is no wonder that sports like boating, which require large commitments of time and money, are declining. I read a report the other day comparing time off granted and time off actually taken, and it was interesting how many professionals take no vacation time at all. I know that at some small companies where I have worked there is an unwritten code reducing your available time off, or your work performance is considered sub par. Look at all the boats in marinas that never go anywhere.

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