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Thursday, 29 January 2015

Ernst's Economy at BNR Newsroom: About demotion and wage sacrifices. The Dutch labour market in deflationary times

Last Monday I was present once again at BNR Newsroom, the semi-live business talk radio show of BNR Newsradio, hosted by the distinguised and savvy presenter Paul van Liempt.

The topics of this evening were:
  • the increasing occurrence of a phenomenon, called 'demotion': employees in the autumn of their career, who get or choose to take a job at a lower level, often (but not always) in combination with lower payments;
  • (involuntary) wage sacrifices for personnel as a means of last resort for companies in distress. 

These subjects were both very topical indeed.

Only one week ago, the story of the involuntary wage sacrifice of 5.8% for all personnel at the Dutch department store chain V&D had been prominently in the headlines of the Dutch newspapers. Many people do expect that more retail companies could run the gauntlet with this crude, but very effective method of saving personnel expenses.

And there has been the statement of Minister Stef Blok for Housing and State Service, that the possibility of demotion would be inserted in the collective labour agreements for civil servants, as far as he was concerned. This would mean that demotion could be a tangible prospect for civil servants, who are approaching the end of their civil career.

Monday’s broadcast of BNR Newsroom also had a personal meaning for me. During the last two years at my former employer (2013 – 2014), I went through an involuntary wage sacrifice twice. This meant that I, and all my colleagues at that company, lost 10% of my gross salary. Apart from the economic aspect, this is also a very intrusive measure from a personal point of view. People can’t help feeling under-appreciated and even betrayed by their executives after such an event.

And perhaps last, but not least: when the times are already very deflationary, like they are at this very moment, events like demotions and wage sacrifices reinforce these deflationary trends. People have less money to spend and also could lose a substantial part of their consumer confidence. Both have a negative impact on the local economy.

These were the main reasons that I wanted very much to be present at this BNR Newsroom discussion.

Paul van Liempt, the presenter of BNR Newsroom
Photograph copyright of: Ernst Labruyère
Click to enlarge
Fortunately, Paul van Liempt gave me the possibility to share my story with the Dutch listeners of Newsroom. I am very grateful for that.

There were four guests on the radio show:
  • Hans van der Spek: Consultant at Business Consultancy firm Berenschot and manager of the Dutch Knowledge Centre for Human Resource Management;
  • Mariëtte Patijn: Member of the executive board of labour union FNV and deputy council member in the Social Economic Council (SER);
  • Klaas Mulder: Philosopher, organisation consultant and writer of the book "Het Pakkenproletariaat" (i.e. "The Costume Proletariat"); 
  • Steven Meester: Vice President Resource Management at USG People 
After the introduction of the show (listen here for the semi-live broadcast), Paul started by asking Hans van der Spek, Senior Managing Consultation at consultancy firm Berenschot, about ‘demotion’ as a new tool in (collective) labour negotiations:

Hans:Half the companies either already has demotion as a policy or is thinking about introducing it. It is not new, but it gets definitely more attention currently. In contrary to the early days of demotion, it is slowly becoming a custom to reduce the salary and perks of the individual employee too.

Hans van der Spek, Managing consultant at Berenschot
Photograph copyright of: Ernst Labruyère
Click to enlarge
Mariëtte Patijn of labour union FNV was introduced by Paul with a question about the involuntary wage sacrifice at department store chain V&D:

Mariëtte: The V&D case was neither a demotion, nor a wage sacrifice. It was a unilateral reduction of wage money by the company management.

When there are solid arrangements, I am not adamantly against demotion as a tool. Sometimes it is possible to make collective agreements about accepting less favourable terms of labour. Adjustments to changing circumstances are sometimes necessary.

However, at companies where earlier official agreements were made about wage reductions for the personnel, like shipyard Verolme in the eighties, it didn’t help eventually. A wage sacrifice from the personnel does not offer a direct solution for rescuing the company. It is only ‘stay of execution’.

On top of that, it is a disastrous measure for low wage personnel; look for instance at the particular case at V&D. These people in average only earn €9 per hour; then a difference of €0,52 cents can be a big difference at the end of the year. Ergo: this measure can only be successful and ethical, when it is combined with a new corporate vision and strategy.

Steven Meester, Vice President Human Resources at USG People (temporary labour agency) is asked whether demotion is also applicable to management positions or not.

Steven: Demotion is definitely applicable to managers. Demotion and wage sacrifices are a trend, as a consequence of the current economic and demographical situation. The fierce economic crisis leads to substantial pressure on wages, while demotion is a consequence of the trend that people have to work more years until their retirement: until 67 years of age, instead of 65 or less, which we had earlier.

The labour market will consist of four generations soon. The question is how we can facilitate this development. That demotion is currently very problematic, is caused by the functional composition of the current labour market.

More professionally organized organisations are probably much better in handling demotion, as the division of labour is organized differently. For instance consultancy firms are much better in dividing the labour application than companies with a common functional structure, as assignments can be varied and guided better under the direction of the employee itself.

Klaas Mulder – philosopher and writer of the book The Costume Proletariat is asked about this particular book, in the context of demotion and wage diminishment.

Klaas: At this moment there is a whole middle class of workers, which can become unemployed overnight. The book is about changes that you see on the labour market.

We have been seeing wage sacrifices for a number of years now: at Cap Gemini, some people saw their wages diminished by 20%. Or look at consultancy bureau Atrivé – my former employer – where the ‘13th month’ bonus [a bonus for common personnel, consisting of one extra month’s payment, which was common practice in The Netherlands  - EL] was abolished.

And there were the freelance professionals, who saw their hourly fees diminish to €45 from €100 per hour. My own editor, for instance, received only €250 for editing a book of 250 pages: that is one euro per page for someone with 3 university grades, for crying out loud! If she would not have done it, somebody else would have. There are simply too much good people available, who don’t have a job right now.

Klaas Mulder, author of "Het Pakken Proletariaat"
Photograph copyright of: Ernst Labruyère
Click to enlarge
This has grave results for purchase power, as people simply see less money appearing on their wage slips. A positive result could be that this is good for our export position, but taking money away from people who earn only €9 per hour, is a very bad thing.

There it is again, the whole export thing! “Lower wages for more succesful exports” is the dominant mantra in The Netherlands and nobody cares if it kills the whole domestic consumption.

Klaas: We should abandon the concept that everybody needs to have a full working week of 40 hours.

Paul van Liempt: Wage sacrifices, like we saw at V&D; do these solve problems?

Steven: It depends from the business plan of V&D. It might work when a company spends too much money, in comparison with sales prices. Volkswagen had such a problem at the beginning of the 21st century. Its personnel made a voluntary(!) wage sacrifice of 10%, in order to keep all jobs, thus diminishing the expenses per car. Needless to say that it made Volkswagen very successful again.

Steven Meester, Vice-President of HRM at USG People
Photograph copyright of: Ernst Labruyère
Click to enlarge
With respect to V&D: only when you see the business plan of this company, you will know whether the wage sacrifice will work or not. There must be an enterprise plan in which one can see clearly, how the executives want to rescue the company. Otherwise, austerity on personnel wages is useless, as it simply postpones the problem.

Mariëtte: In case of a wage sacrifice with job guarantee, one must be convinced that the company will not default after all. Otherwise people will end up with less unemployment benefit money, due to their wage sacrifice. Intervening in this way, like what happened at V&D, is very old school, in the negative sense of the word.

Hans: The wage sacrifice was indeed deployed without further notice. What we now see more often, is that companies already try to answer the question, whether they can continue their business and level of expenses in a durable way, or that intervention – in cooperation with their employees – is necessary. However, this does not happen all the time yet. What happened at V&D was the most draconian format: an involuntary wage sacrifice.

However, you could also think about less intrusive possibilities. For instance, by not paying the periodical wage increases in one particular year. When you can explain your employees the big picture, you will usually get a whole different situation. We saw something like that at Het Dagblad van het Noorden [i.e. a daily newspaper for the Northern provinces – EL]. Employees did the math themselves and sacrificed a part of their wages, in favour of employees, who would otherwise have lost their jobs.

Mariëtte: Still, many people did not get a wage increase for a long time, as there is hardly any wage development currently. Many people can hardly make ends meet right now and for instance many houses and mortgages are under water. Besides that, there are a lot of people, who get their wages by the hour, instead of per month. Temporary workers; freelance professionals, payrollers etc.

Mariëtte Patijn, member of the executive board
of labour union FNV
Photograph copyright of: Ernst Labruyère
Click to enlarge
Many of these people can't buy at V&D anymore – or other shops, as a matter of fact – and this adds definitely pressure on the shop prices. When you compete with labour conditions, you will go down the drain. At this very moment, you see people earning €20,000 per year, who earned €35,000 per year only a few years ago.  

Then I had the opportunity to tell the story of my former employer, who deployed two involuntary wage sacrifices of 5% each, ’in order to save the company’:

Ernst: I worked as an ICT-consultant at a small company in the ICT industry. It was the quite familiar story of a shrinking market, vanishing customers and a company that failed to identify the desperate need for a strategy change.

As even a few lay off rounds, in which in total roughly 40% of personnel had been dismissed, did not turn the tides for the company, acute liquidity problems started to emerge.

This was the reason for a first involuntary wage sacrifice of 5% during July, 2013 and a second one in January, 2014.

Paul: When there are acute liquidity problems, you can do two things: pull the plug of the company or ask for a wage sacrifice. Was it accepted like that by the workers of this company?!

Ernst: The wage sacrifice was never really requested, but just deployed. I later heard that the management was afraid that a majority of the personnel would say ‘No’ to such a plan. That is at the very boundary between right and wrong.

Paul: And were there people who did not accept this and quitted the job?!

Ernst: Hardly. People simply just wanted to work. Most guys had an assignment at our external customers.

Paul: But what happened with your motivation?

The scene at BNR Newsroom
Photograph copyright of: Ernst Labruyère
Click to enlarge
Ernst: The motivation for our employer itself dropped, but nothing changed at our principals. Those people there remained our nearest and dearest colleagues. Therefore the motivation for working there remained high.

Paul: What does it say that people still go their work satisfiedly, even after a wage sacrifice?!

Steven: It has to do with the complexity of a function. For people with complex and interesting functions, the remuneration becomes less important as a satisfier. Especially having autonomy and being ‘boss of your own business’, as well as having control upon your own job, are the greatest drivers. Nevertheless, managers should look at the side-effects in individual cases: for instance, when someone’s mortgage and house are under water.

The executives of V&D have probably looked at the general wage level in the retail industry and came to the conclusion that people would earn less wages at their competition. This made an involuntary wage sacrifice a viable instrument for them. Individual employees then have the choice to resign and earn less money at V&D’s competition anyway, or swallow this lump and accept the wage sacrifice as the lesser of two evils.

Tomorrow I will continue with the second and last part of this article.

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