Published on 31 January 2011 by Tony Groom

Businesses and the UK economy are under pressure from inflation thanks to increased taxes, such as VAT, and commodity prices and also pressure due to declining sales thanks to the reduction in consumer spending.

The current situation is unusual as there has been a considerable amount of wage restraint in the marketplace with employees more concerned about keeping their job than earning more. This fear of job loss however does not apply to all staff, where retaining certain key employees is crucial as their loss would have an adverse impact on the business.

This is a common problem for restructuring advisers who need to solve it when dealing with companies in financial difficulties. While a financial crisis can be a good opportunity to reduce wages and develop a more flexible approach to employment, retaining key people without burdening a business with higher wages is a challenge.

When a business is in financial difficulty management often seeks to reduce staff costs such as by asking employees to take a pay cut in order to help the company survive and to keep their jobs. Under employment protection law they do have the right of refusal but accepting a cut may only be staving off the inevitable, especially if key employees then leave.

Many attempts at restructuring insolvent companies fail due to flawed restructuring strategies and an inability to get the support of staff for a realistic solution. In the case of the Rover car company, too many jobs were retained, and with too little flexibility for subsequent reorganising of the business. The opportunity was there to restructure the company using the £500 million dowry from BMW. But management failure and a lack of ownership of the problem by staff and their union representatives contributed to the company failing five years later when all employees losing their jobs.

Engaging with staff and their union representatives and involving them in any restructuring process can produce spectacularly positive results. Employees tend to be more concerned about the survival and future viability of their jobs, and as a consequence their employer, than most other stakeholders. Banks and lenders tend only to be interested in the security of their outstanding loan, and shareholders often sell their shares or just ‘hang on and hope’ without further investment.

Involving employees in the development of a restructuring plan instead of imposing decisions on them, such as staff reduction or wage constraints, can bring about solutions such as real cost savings and flexibility. A collaborative approach has other benefits as it improves relations between managers and staff, it can align objectives with owners, build a stronger team based on mutual trust.

While commissions are traditionally used to incentivise short-term performance, they don’t establish a sense of a long term ownership whereas equity can. The issue for staff holding equity is that it doesn’t put ‘cash in their pocket’ immediately. The issue for owners sharing equity with employees is that they might retain their shares when they leave. These can be easily addressed with an appropriate agreement where the real issue is one of trust between owners, managers and employees.

This notion of giving employees a greater say in their future exists in other countries, notably in Germany where employees’ representatives sit on the board of directors, and in the USA where unions like the Teamsters often hold shares in their member companies and are actively involved in strategic decision making.

It may mean management has to change its approach as well, but it moves discussion from a confrontational to a consensual model, which is often key to survival when times are difficult. Giving employees, and their unions, a seat at the table from the start also provides another resource for the restructuring adviser in terms of their knowledge and skills in that particular business.

There are examples of shareholder employees in the UK such as at FirstGroup where many employees are also members of the Unite union. However the relationship has not been collaborative with the union not being involved in decision making. Instead management proposes unacceptable pay deals which are rejected on the grounds of being derisory whether or not they are realistic for the business to have a future. This then sets the tone of confrontational negotiations. It seems that employee support is needed to deal with the downside, but they rarely get to share the upside.

From the employee perspective, participating in an equity scheme moves the focus from the short-term preservation of jobs or salaries to the longer-term preservation of the company, in which everyone has a vested interest, and that means greater protection and security especially at times like the present when many people are perhaps wondering for how much longer they will have a job.