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Hard Times

Interview with an employee benefits and compensation consultant on motivating employees in lean times.

You've depended on profits to compensate and motivate employees. So what do you do when profits begin to evaporate?

Successful growing companies often find a number of ways to share their success with employees. But what happens when a once-bustling business hits a downturn? How do you reward and motivate employees when you can no longer afford even slight increases in pay? And what's the best role for the CEO?

Certainly, that isn't an easy shift for either employees or managers. But in the view of Warren Blaisdell, the secret to keeping people motivated during lean times is plenty of communication. Blaisdell, 54, spent more than 20 years at the Norton Co., a manufacturer of abrasives and engineering materials based in Worcester, Mass., where he designed a variety of innovative systems for improving productivity in highly competitive businesses. For the past decade he has worked as an organizational consultant specializing in devising performance-based compensation packages; he's currently a senior consultant with William M. Mercer Inc., an international employee benefits and compensation firm with head quarters in New York City. Late last summer executive editor Nancy J. Lyons and senior writer Bruce G. Posner spoke with Blaisdell.

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INC.: Many of the companies we know build the lion's share of their nonsalaried compensation around profit sharing. The funding pool for those plans is profits, but in a slowdown that source is threatened. What sorts of problems does that create?

BLAISDELL: Well, it certainly presents some major disappointments to those who have grown accustomed to profit-sharing benefits. But if you stop to think about it, profit sharing by its very nature isn't guaranteed. It's built on risk, and inherent in that risk is the possibility that in some periods there won't be enough profit to enable a payout.

INC.: That may be, but do you think most people understand it that way? If the business has been growing and making money for five or six years, don't most employees expect those payouts to continue through thick and thin?

BLAISDELL: They do, and the first time the payouts are cut or eliminated, there's a lot of disappointment and concern. To a degree, though, the reaction is going to be a function of how well the plan and the conditions for payout have been explained. If the plan has been well communicated, it won't be a total surprise when you're not able to pay. As the business runs into harder times, it will be obvious to employees that this period is different. Ideally, they're hearing about problems along the way.

INC.: Are you talking about posting financials on the bulletin board?

BLAISDELL: That's one way to do it, but it's not the only way. You can structure your goals according to how much detail you want to provide. In some cases, we've been able to set up targets and then measure performance in relation to them. You can say, "If we meet 80% of our target, then we will pay out X."

INC.: But why should employees believe they haven't reached the 80% level if they don't see the actual numbers?

BLAISDELL: Well, you need to establish credibility. Without a level of trust, you're going to have problems under any system. Successful plans, whether you share detailed financial results or not, are built on continual feedback. You can't wait until the end of the year to say, "Sorry folks, we didn't make it." One way or another, you need to find a way to give people regular information about how the business is doing, why it's doing well or not so well, what they can do to change or reinforce the outcome in the future. You want to find a vehicle for getting people more focused on the business.

INC.: Sounds as if you're advocating a lot of regular meetings. But most company owners aren't really inclined to talk much when the business is having trouble. And where would they find the time?

BLAISDELL: You really have to make time, even when other demands may seem greater. The most important time to communicate, to spend an hour or so with your employees, is when you're having problems. Memos don't do it. There's no substitute for hearing directly from the chief executive officer.

INC.: When profits are squeezed, companies look for all sorts of ways to cut back. They eliminate positions and freeze salaries. But how do you keep people from getting demoralized by these actions? Does it make sense to say, for instance, "We can't give you the raise now, but maybe in six months"? Or do you tell your employees to forget about it until next year?
BLAISDELL: I think you want to hold out the opportunity. If you've frozen employee salaries, you should be able to say, "Your performance warrants an increase, but because of our circumstances we can't pay it." There's nothing wrong with telling people you plan to review things in six months or whenever the situation changes.

INC.: Say you find you can't afford raises and you can't contribute to profit sharing. What do you do about performance reviews? Do you skip them or go ahead with them?

BLAISDELL: In difficult times I think performance feedback for individuals becomes more critical than it is in good times. When people are concerned about the business and about the future, the more you can tell them about how they're doing and how they can improve, the better they feel.

INC.: You've talked about the need for information, updates, and explaining the business and what needs to happen. What things should managers avoid doing in downturns?

BLAISDELL: What they shouldn't do is hunker down or clam up. People sense problems anyway, especially in small companies. They know what's going on, and the more you try to hide, the more susceptible the environment will be to rumors and misleading information. Without information, people will assume things are worse than they are. You don't create or remodel executive offices or buy expensive company cars. If pay cuts are occurring, make sure managers are feeling the impact, too. Certainly, you don't want to create a situation in which managers are benefiting from cutbacks. I've seen instances in which management bonuses were paid on the basis of work-force reductions. Let me tell you, it sends a pretty negative message.

INC.: Should managers be wary of investing in new products or new businesses when employees are being asked to suffer?

BLAISDELL: Quite the contrary. I think such actions can be viewed very positively as an attempt to turn the business around, that is, if they're adequately explained. Again, it goes back to communication. People want to know what you're doing, why you're doing it, where it might lead, and what it means to them. If the new ventures are intended, at least in part, to provide opportunities for your present employees, then they will want to hear that.

INC.: Say you can't justify any profit-sharing distributions based on your current performance but intend to reward people when performance improves. Can you create incentive plans that are driven by factors other than profit? How do you go about it?

BLAISDELL: Many companies design incentives that focus on specific operating areas where they think improvements are possible. Maybe capacity is constrained, and unless you find a way to increase productivity, you'll have to add more equipment or add on to the facility. Or maybe the amount of material you use is excessive; lowering waste would result in very tangible cost savings. If you focus on those choke points and make improvements, you can reward people accordingly.