March 07, 2009

Keeping Commitments in a Downturn - By Sanjay Anandaram

The current economic environment is naturally forcing companies to watch every paisa of their cash-flows and pounce on any and every opportunity to either save money, defer payments and/or increase inflows. Often times, such hawkish behaviour can lead to a situation where commitments are reneged. For example sample this question from the CEO of a young company “Should we trim or stop the variable payments to our employees during the current downturn?”

At the time of joining the company, employees had been promised variable payouts based on their performance. Accordingly, all of them were expecting some payouts as no one believed they weren’t deserving of any performance payout! Now, the company was struggling to make ends meet and wanting to make the cash in the bank extend many more months. The employees clearly were aware of the situation not just in the company but outside as well. What should employees do in such circumstances?

In addition, given the environment all around, performances by the employees came in below the previously agreed upon metrics that would have made them eligible for performance payouts; In spite of their very best and sincere efforts. So, wasn’t some money due to them? Especially since a pay hike was extremely unlikely?

It is in times such as this that the character of the company’s leadership is demonstrated. There needs to be a fine balance between keeping commitments by rewarding performance and ensuring longevity of the company’s prospects. It is not uncommon for many companies to use the downturn to stop all variable payouts. After all the employees didn’t meet the performance goals as agreed upon, right? It is less common for companies to take the employees into confidence by sitting down with employees and explaining the scenario faced by the company. And asking the employees for their views and suggestions. Many times, employees themselves would offer ideas and perhaps even forgo some payments. In some cases, the leadership can re-negotiate the payout time period – effectively asking for more time to pay. It is also critical that the employee at the lower rungs of the corporate ladder feel the least pinch. For this, those above have to take a larger share of the pressure. And for them to do so uncomplainingly, they need to feel they have an obligation and a right towards ensuring the company’s future. Creating this culture within the company is again evidence of the calibre of the leadership team. Trust in the company and in its leadership are therefore critical requirements for the creation of this culture. Unfortunately, trust usually becomes the first casualty in times of crisis. Again the quality of the leadership determines this.

Commitments are also made to customers, partners, vendors, and the board. Each of these commitments comes under severe scrutiny during times such as the current one. Being open and taking each of the constituencies into confidence before working out a solution is important. The solution could range for example, from renegotiating terms for the current period and agreeing to make good the loss when the times improve to extending the period of the relationship thereby ensuring that the partner or customer gets additional periods of value at lower unit spends to many more innovative actions. After all, necessity is the mother of invention!

Reneging on commitments is a moment’s job while repairing reputations can take a lifetime, if at all. Commitment to commitments is noticed and people will pay attention to you and to the company. As someone said, the only way to convince everyone that you are ready to improvise, innovate and find a solution in a fair and honest manner is actually do it. Character, value systems, ethics and fair play are what are at stake in such circumstances. Great companies are built by great leaders who demonstrate these attributes every day. Company cultures are built each day at a time. Humility, confidence and will power are what will be called into play at such times when short cuts seem all too obvious a recourse.

So what do you think should be done to deal with employee performance payouts?

Sanjay Anandaram is a passionate advocate of entrepreneurship in India; He brings two decades of experience as an entrepreneur, corporate executive, venture investor, faculty member, advisor and mentor. He’s involved with Nasscom, TiE, IIM-Bangalore, and INSEAD business school in driving entrepreneurship. He can be reached at sanjay@jumpstartup.net. The views expressed here are his own.