Hypothetical situation

The situation, events and characters described below are all fictional. They are, however, based on a few similar stories, as recently recounted to me by friends who work in the private sector. Obviously, I am no economist, or labor expert, and so cannot claim to know whether the hypothetical scenario described is realistic (much less frequent). It just sounds plausible to me, and I also believe that it could take place in just about any professional setting.

Imagine a small firm, employing ten workers. Business is good, employees are all hard-working, highly conscientious skilled professionals, and the firm makes a respectable profit. Employees are satisfied with the pay, and happy with their job.
Suddenly, one of them, Mr. A, decides to leave the firm, due to family reasons. The management immediately informs the remaining nine employees that the firm fully intends to find a replacement for Mr. A as quickly as possible. In the interim, however, each of the nine individuals will be requested to pick up part of the tasks previously performed by Mr. A, in order not to disrupt productivity and ensure that the firm not lose competitiveness in the short term.
Because the nine employees that are left fully understand the situation, each one of them readily accepts to take on an additional 10% worth of work. After all, it is on everyone’s best interest that the firm’s profit remain good, and there is the expectation that the staff shortage will be only temporary.

Alas, hiring a replacement worker proves harder than the firm expected. The skill that the person sought should possess are in high demand, and the management is unwilling to make the advertised job attractive by offering a salary that would make the new employee the best paid worker in the firm. Meanwhile, the remaining nine workers manage not to let productivity slip, by putting in extra time.
Three months go by, and no replacement is found for Mr A. The management runs the numbers for the quarter, and is pleased to note that the firm has increased its profit, mainly due to the lower payroll cost, while productivity has remained steady. Of course, this is just a short term effect — any experienced and visionary executive would fully understand that if the staff were permanently downsized from ten to nine, there would be eventually a negative impact on productivity, and therefore on profit. At a minimum, part of the extra profits would be passed on, in the form of bonuses, to the nine dedicated and effective workers who made it possible for the firm to stay afloat, even after the departure of Mr. A.

But the management decides instead to pass the profits on to shareholders. The CEO emphatically states, in his quarterly report, that the firm’s higher profits should be attributed to his aggressive cost-cutting measures, all aimed at reducing waste and promoting efficiency. Shareholder applaud such courageous moves and rewards the CEO with a hefty pay increase. The planned replacement hire is put on the back burner, as shareholders now expect that profits will remain as high as during the quarter that has just ended, and the extra employee, initially deemed indispensable, is now perceived as a luxury.

Time goes by and the fortunes of the firm take a turn for the worse. The nine employees have realized that no help is coming, which means that they are stuck doing extra work at the same pay for the foreseeable future. They feel overworked, and are often exhausted and irritable. For all them, extra work has meant more hours spent on the job and less with their families. While they were happy to take on the burden in the short time, they become increasingly annoyed and resentful at the management, for de facto suddenly cutting their hourly pay.
The quality of their performance starts deteriorating. The atmosphere at work becomes confrontational and tense, as each employee tries to shift onto others part of his or her extra work. Some employees end up taking on even more tasks, while others are now actively looking for other jobs, as they have grown increasingly disenfranchised. They feel taken advantage of.

Another quarter goes by. Productivity is now down, and earnings have gone south. It is becoming painfully clear why the firm employed originally ten people and not nine. Furthermore, the firm finds itself now in a number of litigations with its employees, some of whom have impugned their contract and demanded that their original working conditions be restored. The CEO blames the disappointing showing on the unfavourable market, as well as on the uncooperative workforce, until then “pampered” (unions and all), and now unable to make sacrifices, to adapt to the challenges of the XXI century and its globalizing winds of change. He promises shareholders to turn things around, by carrying out a thorough, systematic evaluation of every component of the firm’s productive process. The goal is that of eliminating “dead branches”.
The outcome of such a process is the decision that one of the nine employees will be let go, in order to cut costs, and the remaining eight will be asked to take on extra work — all in the name of saving the existence of the firm, and with that their jobs.

The workers react in anger and disbelief. The management decides to proceed with the termination of one of the employees, and after much deliberation the axe falls on the one deemed “disposable” (but obviously each one of them is crucial, at that particular juncture, which makes such a denomination ludicrous at best). The excess workload is re-assigned among the remaining eight workers — however, at this point they are all looking around, and indeed another one resigns, lured away by the offer of a competing firm. The firm is now understaffed to a point where production is in jeopardy. In an attempt to replenish staff, temporary workers are quickly brought in, at a fraction of the salary that the firm has traditionally paid its employees.
Once again, the CEO makes boastful claims of cost reduction in front of the shareholders, but the new personnel is not as skilled as those who left or were let go, and has difficulty performing on par with the rest. Productivity declines inexorably, as the firm loses further ground to its competitors…

Well, the ending of the story is likely not happy, and in any case not important. I think I have actually witnessed situations similar to the one above even in academia — to the extent that a university, or a department, or even research group can be compared to a corporation. Assuming that the above happens sometimes, at what stage should something, if anything, be done to prevent the situation from spiralling down ? And if something must be done, what is it ? Whose responsibility is it to intervene early on, when the first deleterious decision is made (in the above example, to continue with just nine workers), in light of a single, deceivingly good “quarter” ?

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5 Responses to “Hypothetical situation”

  1. Schlupp Says:

    “But the management decides instead to pass the profits on to shareholders. The CEO emphatically states, in his quarterly report, that the firm’s higher profits should be attributed to his aggressive cost-cutting measures, all aimed at reducing waste and promoting efficiency.”

    Come on, this is *completely* unrealistic !

    Seriously, the line “but managers’ salaries are just determined by the market” is one of my favorite annoyances. Surely, by now everyone should have figured out that this is a fairly weird market where the value of management is decided by almost exclusively by other managers. What a surprise that they tend to ascribe any success to management and failure to “market conditions”. Eh, that’s what I’d do if the value of scientists’ work were determined only be other scientists.

    It would clearly have been the manager’s responsibility, finding what is best for the company is what he’s paid for. Only, unfortunately, his incentives are in the opposite direction, and he is even better paid for making a worse decision. Setting his incentives right would be the responsibility of the share holders, but *their* incentives only lie in this direction if they are planning to remain share holders a little longer. (Which in a 11-people kind of shop would be rather likely, but then, “10” was of course just an example.)

  2. chall Says:

    I’ve seen something similar with the idea being that the evaluation of the work is done within 3 months from someone leaving… and as you state, the danger is to think that a temporary” situation will be the same if left for another year. It will not. Or at least not until someone is ill/having a child/needing to be off work, since 8 workers (as per your example) is not going to be enough.

    I know of one university that cut down on teachers/lecturers and therefore ended up with very few number of teachers, then filling in with graduate students and later on with temp hourly teachers. The students felt confused, the quality of education went down simply because they were underpaid and had less resources. Alas though, it was all about money… and it was hard since the department got money for the students but the university paid salaries… anyhow, it’s interesting nevertheless.

  3. Ian Says:

    I’m not sure the appropriate time to act, but I do know that well run unions need to combat this nose-dive management style. If there’s no union in the company – then the workers are falling behind.

    Of course having just watched The Trotsky, I have a bit of a Marxist thing going around in my head.

  4. Cath Ennis Says:

    Ah yes, the joy of “per employee” performance metrics that make it look like layoffs increase productivity…

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