We’re coming up on that time of the year and considering the economic climate I thought this post from 2006 especially apropos.

Do you work hard? Did you, or will you, take a vacation this year? A real live vacation during which you actually disconnected from your office/business/work?

If your answer is no, you have a lot of company. The attitude/action even has a name, it’s called “shrinking-vacation syndrome” and it’s prevalent.

Smart bosses know that people need to get away, not just to recharge their batteries and creativity, but to reduce stress and rebuild coping skills. Taking the office along defeats the purpose—especially in these days of ’staycations’.

Smart people know that cramming everything possible into the available time (especially when kids are involved) leaves them more frazzled than they were at the start.

But if you’re not PricewaterhouseCoopers, which has taken to shutting down its entire national operation twice a year to ensure that people stop working, what can you do?

Several things…

If your company offers paid vacations insist that your employees use them. Not by taking them away when not used, but by including “staff taking vacations” as a line item in every manager’s review.

If you’re a small biz that can’t offer paid vacations consider allowing your employees to trade paid holidays for different days they want, e.g., working July Fourth and Thanksgiving in trade for a Friday and the following Monday off.

Small biz owners should also consider closing one Friday with pay at least once, preferably twice, a year, e.g., the Friday after Thanksgiving (or a similar day). Consider it an investment as the ROI in increased productivity and retention will surprise you.

If you’re one of the many managers, found at all levels and in all sizes of companies, who don’t believe in vacations and intimidate your people so they don’t take one, or insist that they “deal with stuff” while gone, I sincerely hope you have few personal expectations and excellent hiring skills, since you can look forward to low productivity, high turnover, and poor reviews no matter where you work!

Image credit: sjtoh on sxc.hu and s’nimm on flickr

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Many economic pundits are predicting the end of this economic meltdown (see previous post). Chalk those predictions up to the optimism of springtime and the need to fill a news cycle.

While rates of decline for various economic indicators may be decreasing, the excesses that created this meltdown will take years to work through. The ham-handed responses by government and many businesses will only delay the eventual recovery. This is only a break in the winter weather.

But even as the economic meltdown is only now approaching its nadir, a few new businesses may find this to be a fertile time to set up shop.

Consider the single greatest expense and challenge of most new businesses – finding and attracting talented workers, trained and immediately available for interesting work.

Currently the US economy provides 155 million jobs. This meltdown has reduced employment through five distinct mechanisms shown in the table below:

Given that the measured statistics are usually undercounts and that these unemployment/underemployment numbers will grow in the next 12 months, likely over 32 million workers (over 20%) in the US will have talents and time available to participate in another business.

For many companies, payroll costs represent over 65% of total expenses. For new ventures, personnel costs can be much larger, up to 90% of expenses. In this environment, many workers are searching for work.

New ventures traditionally offer below-market compensation for their workers. However, they offer other significant benefits.

Typically, new ventures offer broader scope in each job, better growth opportunities, ability to make large, direct, measurable contributions to the organization, and the enthusiasm of working in a small, close-knit team. Some new ventures offer profit participation or stock options. For unemployed or underemployed workers, these benefits can be significant, even when the cash compensation is low.

Technology and the recession have dramatically reduced other business operating costs. The cost of computers, phone systems, and tele-conferencing have dropped. Office space is cheaper, and home-based employees can cut that cost even further. Travel, where necessary, is cheaper than any time in the past ten years.

Even without easy availability of capital for start-ups, this recession may offer fertile ground for new ventures and with the added benefit of retaining far more of the equity.

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Who’s innovating? Why is it important to stay focused on innovation? How are companies doing it in today’s economy?

Check out Business Week’s story on the 50 Most Innovative Companies and don’t miss the side bar on the 25 most innovative companies you’ve probably never heard of.

A second innovation commentary comes from consultant Peter Bregman who offers up and interesting perspective on why it’s better to be David in this economy than Goliath.

Finally, what’s happening in compensation these days aside from Wall Street bankers with dubious bonuses?

Here’s the information for those of you wondering what CEOs are earning or whether it’s worth going for an MBA.

Image credit: MykReeve on flickr

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Who’s innovating? Why is it important to stay focused on innovation? How are companies doing it in today’s economy? Check out Business Week’s story on the 50 Most Innovative Companies and don’t miss the side bar on the 25 most innovative companies you’ve probably never heard about.

A second innovation commentary comes from consultant Peter Bregman who offers up and interesting perspective on why It’s better to be David in this economy than Goliath.

What’s happening in compensation these days aside from Wall Street bankers with dubious bonuses? Here’s the information for those of you wondering what CEOs are earning or whether it’s worth going for MBA.

That’s it for this week. Have a wonderful weekend and keep your eye on the innovation ball—that’s really what pays.

Image credit: MykReeve on flickr

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Economic pundits, eagerly searching for signs of the recovery, are grasping at almost anything. “The rate of decline has slowed.” “Unemployment has stabilized.” “The cardboard box index has bottomed out.” And the shape of the recession and recovery has been predicted to be a V,  W,  L, or even a double-bounce W.

I think they’re all wrong.

The old economy will never come back.

This economic meltdown is much like a forest fire. After the fire burns itself out, the storm may be over, but the burn area is fundamentally changed. It does not “bounce back.” It starts at a different place.  Sometime in 2010, the economy will stabilize, but it will not “come back.” We will go forward from a fundamentally different position. This new starting point will reflect the impact of deep, long-term, global trends in the nature of work, the value of the dollar, and our relationship to our government. The current recession is a convenient marker to recognize these trends.

Work Is Changing

The nature of employment will continue to change. The United States will continue to shift to a “just-in-time,” service-based workforce. The manufacturing sector will continue its decline, from 29% of GDP in 1950 to 15% in 2000 (see analysis by Dr. Mankiw). It will drop below 10% by 2010. You can construct your own labor trend at indeed.com. ( This website is a fascinating example of the business of data, which we discussed in the last three posts.)

Many new service-sector workers will be involuntary. Growing unemployment and under-employment in the United States (which will exceed 15% this year) is driving many people into self-employment as service workers. An analysis of Japan’s Lost Decade by Tom Coyner, long-time resident of Japan and Korea, provides one instructive example of this phenomenon, and some associated risks.

These new service sector workers will be driven to a “do-it-yourself” model for almost everything. They will have to provide their own health care plan, retirement plan, office arrangement, and business planning. Many of these workers will be home-based, with little differentiation. The most common product/pricing model will be piecework, with unit pricing based on the alternative of being completely idle. Ironically, one result will be the re-integration of work and home life.

Entrepreneurship is Changing

Investment capital will no longer be available for any but the most solid businesses; and the vast majority of these newly-independent service workers do not have plans to build large businesses. As a result, the successful ones will exhibit four common, positive characteristics:

Local—In a global world, being present still counts. A local service provider who can show up in person has a distinct advantage. In addition, some services simply cannot be outsourced. When your car is broken or your roof leaks, you need a local service person. For locally-based services we may see an increase in a local, personal relationship with service providers.

Immediate—Without investment capital to fund long-term research and development, independent service-providers and small businesses must focus on services that provide immediate value. The “cash-to-cash” cycle must be less than one pay period. Fortunately, credit/debit cards and other immediate payment methods support this trend.

Information-based—Information will provide significant improvements in service quality and competitive differentiation. For instance, simply finding a customer is difficult and expensive. Irritating prospects with unnecessary and unwanted sales promotions is also costly. Successful service providers will use information to target customers on a “just-as-needed” basis.

Green—Setting aside the discussion of whether the earth is warming or whether green is good, government policies will reward green activities preferentially. Independent service providers will offer green services or enhance green aspects of their existing services.

Start-Ups Will Explode in Unlikely Niches

The availability of many talented people and the flexibility of independent service providers will fuel new start-ups. While these may not completely replace the loss of investment capital, they will certainly provide an alternative path of low-cost labor for new businesses. The change may be refreshing, for us individually, and for our economy.

This is perhaps the greatest unknown—how much will individual creativity and inspiration replace financial engineering.

I am hoping for a few delightful surprises ahead.

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The Carrot Principle, AKA, How the Best Managers Use Recognition to Engage The People, Retain Talent and Accelerate Performance, by Adrian Gostick and Chester Elton was first published in 2007.

A new, updated, release this month with a new chapter and the results of an extensive 10 year study of 200,000 managers and employees that confirms what most workers have always known—recognition, not just money, is what draws them in, engages them and results in high performance.

But there’s a catch. (There’s always a catch.)

You can’t just start running around throwing recognition and carrots at your people.

There are four basics of good management you need embedded in your culture—but first they need to be embedded in your MAP (mindset, attitude, philosophy™). They are

1. Goal Setting;
2. Communication;
3. Trust; and
4. Accountability.

The bad part is that if you don’t already believe in this stuff and have a culture that reflects it then the carrots of employee recognition will be tossed out by your people. Your people aren’t stupid; if you decide after reading the book that recognition is a better way than threats and screaming don’t expect to turn things round overnight. It’s going to take consistant effort over a period of time to convince your people that you’ve changed. How long depends on how bad you were and how sincere your changes are.

The good part is that you don’t have to work in a company or for a boss who thinks that way. Gostick and Elton give multiple examples of how “carrot culture” was implemented without support from either.

Carrot Principle walks you through the process and explains how recognition can be practiced in multiple moments without budget-busting amounts of money.

Recognition leads to extreme engagement and successful managers provide their people with frequent and effective recognition.

Image credit: Simon & Schuster

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In a post last week I asked for opinions on the ideas presented in a series of articles in Business Week on managing smarter but especially one that claims that “treating top performers the same as weaker ones is ’strategic suicide’” and said I would add my thoughts in a future post.

Bob Foster left two interesting comments (well worth your time to click over and read). Regarding pay for performance he tells the story of a company where everybody from the CEO down all quit.

“Taking on the task to salvage the company, I hired new people that met unusual qualifications: they had to be qualified for the job they were applying for; they had to be unemployed and available immediately; they had to work at sub-standard wages; they had to work while knowing the company could close at any minute; and they had to work without supervision. The team that came together produced a highly successful company, and it was not because of high pay, or performance bonuses (there were none). The team stayed together, and performed, because of mutual respect, trust, appreciation, and consideration—people were ‘valued.’ To me, this is the truest form of ‘pay for performance.’”

I agree that trust was one of the key ingredients in what Bob accomplished, but it wasn’t the only one—or maybe I should say that it needs to be based on fairness and honesty.

Bob says the pay was ’sub-standard’, but I assume that it was universally sub-standard relative to position and experience. If he had chosen to pay part of the team, say 10% more than their peers, the team wouldn’t have coalesced.

And that is exactly why I disagree with the idea of paying top performers, AKA stars, big sign-on bonuses or higher salaries than their peers.

• Based on my own experience, 98% of star performers become stars as a function of their management and the ecosystem in which they perform. Change the management, culture or any other parts that comprise that ecosystem and the star may not survive.

• Just as a chain is as strong as its weakest link there is no star in any sport, business, media, etc., who can win with a team that is subject to constant turnover and low morale.

Consider this common example.

Two people are hired at the same time with the same background, same GP0 and similar work experience, but with the one exception. One graduated from a ‘name’ school and the other from a community college. Starting salary is $50K, but the manager adds a 20% premium to the first candidate’s offer on the basis that she must be better to have gone to that school.

Neither candidate lived up to their potential because the manager made poor choices. In doing so he set both up to fail but for different reasons; one thought she had it made and the other that he was low value.

Merit bonuses fairly given for effort above and beyond acceptable performance levels make sense as long as they don’t come at the cost of developing new talent.

But one problem with ‘pay for performance’ is the pay often comes before the performance, but there are others and I’ll discuss them more Thursday. In the meantime, here are links to five posts from 2006 that give more detail on the trouble with stars.

Stars—they’re in your MAP

More about stars and MAP

Rejects or stars?

Star compensation

Retaining Stars

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Alexander Kjerulf over at Chief Happiness Officer shared a fascinating write-up (one of the case studies for his new book) about Wim Roelandts, CEO of Xilinx, managing through his eighth recession. During 2000 recession Wim decided there was a better way than the standard Silicon Valley of repetitive rounds of layoffs—and he proved there was. He called his strategy “Share the pain;” it was completely voluntary and 2799 out of 2800 employees opted to take the graduated pay cuts. He held fast in spite of opposition from both his Board and Wall Street analysts and it worked.

Next is a new book by Dave Hitz who co-founded $3 billion NetApp, number one of Fortune Magazine’s 100 Best Companies To Work For. How To Castrate A Bull & Other Corporate Survival Tips looks like a great read. Enjoy!

Last but certainly not least are two takes on Tony “A company’s culture and a company’s brand are just two sides of the same coin” Hsieh, the guy who built a billion dollar company on its culture. Both are takes on his keynote talk at SXSW 2009, but bring out different points. The one from Fast Company includes seven steps to incorporate Zappos core values into your company; the other is The Onion’s Baratunde Thurston via CNET.

Have a wonderful weekend!

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I’m no happier about the AIG and other bonuses paid to screwed up Wall Street banks, but I’m not sure why any of us are surprised.

“In the largest 25 corporate bankruptcies between 1999 and 2002, while hundreds of billions of dollars of investor wealth and over 100,000 jobs disappeared, the Financial Times found the “barons of bankruptcy” made off with $3.3 billion.”

Giant compensation packages, guaranteed bonuses and platinum parachutes are excused by Boards and executives as necessary to attract the “best and brightest,” but here’s what’s really going on.

The ‘names’ demands outsize compensation/stock options/guaranteed bonus/etc. in order to validate their ‘brand’.

Those responsible for hiring not only meet the demands, but even exceed them in an effort to attain or sustain the company’s reputation as a better home for ’stars’—the more stars you have the greater the bragging rights— mine’s bigger than yours in high school locker room talk.

Now let’s consider the folly of this attitude.

Those hiring often seek a name brand in the mistaken belief that the brand comes with a warranty that guarantees good results.

But no matter who you hire you’re actually paying for their past performance, which is always influenced by

• circumstances—boss and company positioning in its market and industry
• environment—culture and colleagues;

and let us not forget that minor factor

• the economy.

The hiring mindset is that everything the brand accomplished was done in a total vacuum and dependant only on the brand’s own actions, therefore changing every single surrounding factor will have no impact on performance.

Put like that it sounds pretty stupid, doesn’t it.

This is one of the prime reasons that so many CEOs bring their ‘own team’ over when they move, as do managers all the way down the food chain—they know they didn’t do it alone.

CEOs aren’t like movie and rock stars whose very names draw consumers into spending money—nobody ever bought a product from GE because Jack Welch was CEO, nor do they carry Jobs iPods—so why pay them that way?

Moreover, assuming that performance occurring during an expansion is a valid yardstick for performance in general, let alone a downturn, is sheer idiocy.

You have only to remember the difficulties faced by people whose management skills were honed between 1991 and 2000, the longest expansion in our history. When the recession hit in March of 2001 they had no experience whatsoever of how to drive revenue or manage in a down economy.

That recession and the previous one in 1990 lasted only 8 months each. The longest recession we’ve had was 2 years, January-July 1980 and July 1981-November 1982, and that one had a 12 month break in it. This means there are a very small number of managers with any actual experience managing in anything even close to what’s happening now.

The current recession officially started in December 2007, so it’s already 15 months old and the end isn’t in sight.

What experience makes these folks the ‘best and brightest’ for today’s world?

Just what the hell are companies still guaranteeing oversized compensation and exorbitant exit packages when now is definitely the time to pay for future performance—no guarantees.

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The great thing about this this blog is that I have the luxury and pleasure of taking a longer view in one of the most turbulent economic times since World War II over fifty years ago, as I’ll be doing over the next few weeks.

Globally, we are seeing seismic shifts in trade flows, financial relationships, business fundamentals, and the balances between people, governments, and business. In many ways we are corks bobbing about in these economic tidal waves.

However, we are corks with intelligence and capability. While we cannot change the tidal waves, we can and should understand them in order to improve our own lives and the lives or our co-workers and friends.

A long view can provide understanding and perhaps some enjoyment in the understanding. But  it is also valuable to connect that long view back to the here and now, to address the question “What do I do about it?”

In this article I address the fundamental shifts occurring in employment models in the United States, tracing the roots of the “lifetime” employment model that emerged in the aftermath of World War II. That model has crumbled and the new models are only now appearing.

Tying this long-term trend back to today, we look at two companies pioneering new employment models.

The Old Model—Lifetime Guarantees

Since World War II large US companies offered an amazing, lifetime employment agreement to their workers. This lifetime agreement had three planks:

• Lifetime employment at the same company
• Lifetime health care
• Lifetime retirement

Following World War II, the United States represented only about 5% of the world’s population, but controlled over 95% of the world’s economic activity. The economic infrastructures of Europe, Russia, and Japan had been destroyed. These countries had also lost almost an entire generation of young men, further crippling their economic activity and recovery.

American companies competed only with each other, and completely dominated the global economic landscape. Several factors—tax structures, unions, and a very limited government—led companies to take over the responsibility for health care and worker retirement planning. Since American companies competed primarily with each other only, they could offer the “lifetime employment” agreement mentioned above.

Today the world has changed. The United States still represents about 5% of the world’s population, but controls only about 25% of the global GDP. American companies compete with the

• EU, where governments have taken over the responsibility for health care and retirement, and
• emerging countries, where no one takes responsibility for the workers’ health care and retirement.

American companies can simply no longer afford to offer the three benefits of lifetime employment – job, health care. Some new models are emerging, but they themselves will change as the global economy continues to shift.

The New Model—Just-in-Time Workers, Do-it-Yourself Benefits

The new employment model is just-in-time, do-it-yourself. Companies now acquire workers just-in-time, shifting their employment burden to independent contractors and outsource service providers. Workers, even the direct employees,  are responsible for their own healthcare and retirement planning. Indirect payroll costs for direct employees will climb significantly in the next ten years, so companies will continue to reduce their direct employee base and increase their use of contractors and outsource providers.

Example—Building Contractor Restructures for Cash Flow

A Texas building contractor I’ll call TexHomes provides a good example of a “new model” small business. In this post we will focus on his employment model, saving the business model for later discussion.

TexHomes sharpened the company’s focus on restoring foreclosed houses—traditional single family residences, typically restoring about 50 homes each month.

With the sharpened focus, TexHomes needed fewer subcontractors, primarily painters, carpet layers, and maintenance people. With the steady volume and a smaller number of subcontractors he experimented with direct employees, planning for improved control.

But the costs and paperwork escalated rapidly, and the company lost considerable freedom in other areas (retirement contributions, health plans, vacations, etc.). So the company switched back to a subcontractor model for almost all of its workers, even though it provides them with full-time work. Currently the company has a very tight work team:

• Employees – 3 people. CEO/owner, Business Manager/co-owner, Accountant (CEO’s wife)
• Independent Subcontractors – 12 people. All the trade workers are independent subcontractors.
• Outsourced Services – every other function. The company uses an independent accounting service, an independent HR service, and independent maintenance service for all company equipment.

With only three direct employees, this company qualifies as a small business, thus reducing its regulatory compliance burden. In addition, the company operates from a home office, further reducing its operational expenses. Since the three direct employees are also owners, the company can coordinate employee benefits to maximize total cash flow to the owner/employees.

The company generates over $20 million in annual revenue with a pre-tax profit margin exceeding 35%. While it may be a small business, it generates considerable cash for its owners and workers.

Unlike the construction industry, many businesses do not have a long tradition of independent subcontractors. However, you may want to consider how you can apply some of these lessons to your business.

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