Whatever the size of your organization it is your people who determine your organizational value added. Thus it is more than a cliché to say, "Our people are our greatest asset." So treat them as such and use that value to measure human contribution and reward it appropriately.
For nearly two hundred years since the start of Industrial Revolution the workplace has been a battleground between the perceived different interests of business owners and their management representatives on the one hand, and workers on the other. And, unfortunately, much of this conflict has become encased in ideology. The accumulated arguments have, over time, cemented to the point where they have assumed an aura of truth that makes them inviolable. This has hardened attitudes and shaped historical perspectives and positions and given rise to entrenched intransigence. Thus, anyone who challenges a particular perspective is automatically assumed to fall into the opposite camp. So, notwithstanding the dramatic liberalisation of employment legislation in recent decades, with increasing emphasis on human rights, improved working conditions and greater employee empowerment, the embers of this industrial conflict have still not been extinguished.
You may perhaps argue that this unavoidable. You may claim it is simply human nature and an inevitable consequence of some being better off than others and the less well off resenting their misfortune. However, there is a danger in glibly accepting such arguments, as well as in getting too involved in this apparent inviolability of ideology. You only have to think of the history of the 20th Century to recognise the dangers of this.
Much of the history of last century was shaped by the power-struggle between the great super-powers. And that of course was itself shaped by the ideological differences between Capitalism and Communism, which was itself the ultimate delineation of the discrepancy between the owners of business and the workers. And while the collapse of the Berlin Wall might seem to have heralded the demise of Communism, the collapse of the banking industry in 2008 and the current perilous state of the global economy suggests that Capitalism is not all it was cracked up to be and has also been found wanting. It would seem that the ideological arguments have not yet been settled and even now the anti-capitalist rhetoric is growing as a privileged generation finds itself facing the unprecedented threat of declining living standards. Furthermore the growing concentration of wealth in the hands of a few and the increasing wealth and earnings disparity poses a very real threat to global economic well-being. Henry Ford's lessons are being forgotten and revolution will become a very real prospect if this is not addressed.
It is therefore imperative to take a fresh look at these underlying issues; not least because the continued conflict is untenable in a globalised world of mutual dependency. It simply does not make any sense for employer and employee not to be totally aligned when it is clearly in the best interests of both to ensure the organization operates at optimum efficiency. Nor, in an increasingly populous world, where the environment and sustainability are increasingly important issues, can we afford the kinds of inefficiency of the past. We owe it to future generations to make the best use of all our natural resources.
Let’s move away from all the ideological debates and discussion for a moment and look at some basic truths of business.
- Any business has a purpose which is fundamentally to meet some sort of societal need. That is its raison d’etre. Thus a business is intended to meet a human need or stimulated want. At this point structure is irrelevant. As long as there is a need, there is a role for the business to play.
- Any business requires some sort of organization to fulfil that purpose. By definition some sort of provision has to be made to gather, collate and distribute resources to the person who wants or needs that product or service. Invariably that provision cannot be met unilaterally, but requires input from other people.
- The more effective the people are and the contribution they make, the better they will be able to deliver the required product or service. “Better” here is an umbrella term that could include a number of facets, including qualitative and cost-effective measures.
- The creation of any organization generally requires some form of funding or financing. In order to assemble the people and the resources to deliver the product or service, you have to pay to bring them together and you have to pay more to facilitate their effective combination.
- The provider of the funds and the provider of the labour both want some sort of reward for their contribution.
Nothing controversial there then, is there. So where does the controversy come in?
The controversy comes in with the question of ownership and the associated risk. Historically the risk has been attached to the provision of capital and generally this has given risen to entitlement of the people who have funded the business to receive the benefits of all the surpluses arising from the business after all the other costs have been met. This might have made sense for the merchants and traders who originated the modern commercial systems, but is questionable in this modern day and age. You could possibly think of any number of reasons for challenging this, but let’s confine ourselves here to just two.
- The capital markets mean that it is both easier to raise funds through share capital at any given time and to transfer ownership and hence risk. The biggest implication of this is that it decreases the scale of risk the investor is undertaking, for:
- It makes it easier for them to spread their risks over a number of different investments, and so dilutes the risk, thus surely reducing the requirement for such generous rewards;
- The free market means that they can generally transfer their risk to someone else at any time they are uncomfortable with the perceived risks and/or rate of return;-
- As owners they are further removed from the day-to-day decisions of running the business, and – through the services of professional managers hired to run the business on their behalf – are less likely to face the same risks they would if they were running the business themselves.
- With the investors and shareholders able to hedge their risk by spreading their investment, you could argue that is the employees who bear the greatest risk if the business fails, for it is they that lose their livelihoods if the business fails. This means that they are more likely to suffer greater inconvenience and hardship than the investor or shareholder.
Over the past decade or two, business has been distorted and discredited by the call that it is all about maximising the shareholders’ returns. Now that we have seen this to be a fallacious argument, we need to think again. Yet it does not require any new principles or edicts: simply a return to the fundamentals of providing a product or service to the client/customer in the best manner possible. Only then can you build a sustainable business that will survive in the long-term. And, surely the employees are the people best placed to help you guarantee this.
When you look at business in this light, you have to think that there is a good case for looking to give the employees a greater reward for the part they play. Indeed this role becomes even more noteworthy when you go back to the second of the earlier points and acknowledge that business performance is the result of the sum-total of all the collective efforts of the people who work in the organization. Admittedly their individual contribution is recognised and rewarded by their remuneration, and the scale of their earnings reflects the level of that contribution. Nevertheless, it is the synergistic efforts of the collective that determines the ultimate performance of the organisation as a whole. Consequently, that should – in all justice – entitle them to some share of the excess earnings over costs of the business. Shouldn’t it? After all, even the million dollar men cannot do it on their own!
So how can you do this?
Well, you can start by breaking with the tradition of calling your people assets but treating and managing them as costs. Have you ever stopped to think about how differently you might manage your people if you managed them as you do other assets? Well, doing this gives you that ability. It is a four-pronged process that works as follows:-
- Human Assets: Each person is valued and accounted for as an asset, with their values being aggregated up to constitute a figure for “human assets” for inclusion on an internal balance sheet.
- Human Capital: The need to ensure the balance sheet still balance necessitates a corresponding liability account. You achieve this by means of an accounting journal entry to a Human Capital Account. However, rather than treating this conventionally as just a capital reserve, by including it as part of Owners’ Equity you can actually make each employee an owner in the business with a stake equivalent to their individual asset value. This creates an employee ownership model that makes each an every employee a co-owner (so long as they remain employed) without any cost being incurred by the employee or the organisation and without any equity or any of the issues associated with equity ownership.
- Rewards of Ownership: By making the employees co-owners of the business you effectively create an inherent co-operative model within the capitalist structure. This means that you can create a two tier dividend structure that pays a dividend to shareholders (a capital dividend) and to employees (a labour dividend) at a single rate, and so dispense with many, perhaps even all, of the problems associated with traditional incentive schemes. It also addresses the widening earnings gap which threatens to destroy the very fabric of our economic order.
- KPI: With Human Assets you now have a new standard performance measure, ‘Return on Human Assets’ that offers a new benchmarking measure for the effectiveness of people management. This is more accurate, more meaningful and less able to be manipulated than FTE and ensures that people are managed consistently on the same basis as other assets and that management is therefore more accountable for the way it oversees this resource.
Perhaps the most significant feature of this solution is the ownership model, for it offers all the benefits of conventional employee ownership and the alignment of shared values and common purpose that comes with it without any of the disadvantages, as well as the following unique benefits:-
- It offers universal ownership to each and every employee;
- There is no cost to either employee or employer;
- There is no equity involved and none of the complexity of administering equity stocks or shares;
- It can be an adjunct to employment with affecting the nature of the employment contract in any way. Ownership vests and ends with employment (unless you introduce rules that decree otherwise.)
- Because the stake is aligned to the individual’s asset value it retains the “capitalist” incentive and inspires the person to optimise their value, which in turn necessitates optimising their contribution to the business in whatever capacity they are employed.
- It could be applied to any type of organisation.
At the same time the labour dividend offers the following benefits:-
- It is entirely contingent on how the business performs. If the business does well so will the employees, but if the business does not then no-one does. You thus eliminate many of the problems with bonuses and rewards that are seen to be unwarranted and undeserved.
- It removes many – if not all – the issues associated with performance related pay, as performance and assets value are linked rather than pay. This should remove many of the perceived injustices and inequities associated with performance related pay and performance measurement. At the same time it also eliminates some of distortions and unintended consequences associated with performance related pay.
- It is equitable. This means that it cannot be manipulated or favour some people over others. This also eliminates the shortcoming of the disparity of existing bonus schemes which contribute to the growing earnings disparity by rewarding high earners bonuses that are a hundred percent or more of their salary while the lower earners are fortunate to get more than five percent.
In addition to aligning the organisation and thus helping develop organizational integrity and the effective operation of the organization as a single team, this model also creates an organization that will automatically tend to move towards its optimum size in terms of employee numbers, because the employees themselves will create the peer pressure that ensures that there are no passengers and that every employee pulls their weight. Of course this also means that there will be less need for traditional management controls, because effectively people will be robbing themselves and, once again, their peers will ensure that their colleagues conform.
This solution offers a healthy fusion of Capitalist and Communist principles that offers the best of both and eliminates the historical ideological conflict between the two approaches. It recognises and rewards the contribution of labour and the increased risk that employees bear vis-a-vis shareholders and investors while still recognising and rewarding the vital contribution that investors make to the business.
It offers a revamped Capitalism in so far as it rewards performance but is does so by recognising the organization as a single team, and the fact that success is the result of the collaborative efforts of the entire team. At the same time it inspires the individual to be the best they can be, in order to optimise their contribution and hence their earnings potential.
Simultaneously, it stimulates collaborative teamwork by encouraging people to work more effectively for the greater good of the team, and in the knowledge that the rewards for individual effort will be recognised and rewarded as a result of the team effort and performance, and – significantly – that the rewards will be equitable.
This solution thus offers a unique way to overcome traditional industrial relations issues, and to align managers and workers , by effectively creating an environment in which every person is working for themselves in their own business. This embeds a culture of continuous improvement that promises to transform business results, ensure that the business fulfils its purpose and safeguard its sustainability. At the same time it also offers greater employee engagement (one of management’s biggest current challenges) and thus a collaborative environment in which people look out for one another and the best interests of the business, with considerably enhanced customer focus.
Furthermore, this model compels better communication throughout the organization. It invokes a sense of employees as citizens rather than servants and thus engenders and encourages self-management rather than autocracy. This not only embeds empowerment but makes operations more democratic and offers a viable, practical alternative to traditional command and control management by demanding greater leadership rather than authority by position or title alone. In turn this reduces some of the stress of management alone to keep coming up with foolproof controls as well as removing the false responsibility for motivating employees – something which is inherently innate and only the people themselves can do.
All this also automatically ensures that the organization will be a better corporate citizen too. It not only aligns the organizational purpose with the greater good for which it was created but also provides greater checks and balances on the excesses of greedy or over-ambitious corporate leaders. Of course there can be no guarantee that these will be infallible, but they are certainly more likely to prevent Enron type environments from developing.
It also offers a new approach to stimulating and re-energising the economy and helping lift it out of the economic doldrums currently be experienced.
The first steps are to find organizations that recognise the powerful potential of this solution and that are willing to invest in and work to become early adopters.