Profit, or loss?

Many threats can be turned into opportunities.  And Emirates certainly has a threat to deal with.  The situation has been deteriorating for some time, but a tipping point was perhaps reached last year.  The company motto, promulgated by the HR department, was simple – ‘If you don’t like it, you can leave’.  In EG-IT this was supplemented by Patrick Naef’s approach of ‘If I don’t like you, you will leave’.  Now people will choose to leave if nothing positive is done.

But this major threat could not come at a better time.  The price of oil has fallen dramatically, averaging around a third below its expected level throughout the second half of the financial year.  Fuel costs represent about 40% of the airline’s operating costs so there should be an additional profit of around 6% this year.  Even without the reduction in fuel price, Emirates would be making a healthy profit, so this is truly a large windfall.  As always, the discussion about what to do with the profits will already be underway and I hope there is a strong focus on the problem of staff morale.

Of course, an obvious answer is to be appropriately generous with the bonus but, though I said earlier that opportunities often evolve from threats, it can also work the other way.  A single and large pay out to staff will be very well received but, unless people genuinely believe that things are going to change, a healthy bonus could be the perfect trigger for people to move on.

Personally, I do not like company profit share schemes.  In principle they make sense, encouraging everyone to share the common goal and benefit from achieving it, but too often corporate results are influenced, even blitzed, by external factors.  This year is a perfect example, as a large slice of the airline’s profit will be a direct result of the unexpected fall in oil price – should staff be rewarded for that?  In other years, when targets were not met (due to a more hostile external environment) and everyone worked their socks off to keep the company’s head above water, staff received no reward.  I agree that you cannot divorce company performance from reward, but remuneration policies have to make sense to day to day activities.  Also, a big pay out usually results in a more challenging target (which is less likely to be achieved) being set for the following year, increasing attrition rates.

Another thing I do not like about profit share schemes, annual bonuses, etc. is that they do not last long in terms of staff motivation.  It’s great hearing about it and even better spending the money, but it doesn’t take long to be forgotten.  And, in truth, expectations are rarely met.  

It has to be remembered that the Emirates approach does not reflect a true profit share scheme.  I would call it ‘a discretionary bonus, paid in the event of the profit target being exceeded and, to some degree, related to the size of the excess profit’.  Understandably, there is a fair degree of cynicism about the scheme.  A true profit share scheme is one that is clearly defined and properly audited.  Of course, companies across the globe have flexibility in how they treat certain aspects of expenditure and income thus allowing them to influence their declared margins, but this is normally exercised with the tax authorities in mind!  However, the traditional and lame ‘fobbing off’ messages – e.g. “bad weather in France”, “unexpected fall in the value of the Rouble”, “the price of fish in Japan”, etc. – are normally reserved for subduing shareholders’ anger about a genuinely poor company performance.

Annual bonuses can also be divisive.  There is a general acceptance that those with larger salaries will receive more cash, but I feel uncomfortable with a system that increases the percentages of bonuses for senior managers.  The argument that the more senior someone is, the more impact s/he can have on the company’s performance, does not wash with me.  That has already been accounted for in the shape of a larger salary and an already larger bonus, without the need for multipliers.     

Low salaries (for some) and high staff turnover has been a strategy that has worked well for Emirates.  One cannot fault the basic principle – if you pay enough below what a job is worth and the cost of recruiting does not fill that gap, you appear to make a saving.  But this approach reflects narrow thinking.  I worked for a company that paid in the upper decile of industry salary ranges and were thus able to recruit and retain the best staff.  The efficiencies realised just from having the best staff more than paid for that policy.  There were many other benefits too, including a much slimmer HR department which could focus on the important task of developing careers to the advantage of individuals and the company, rather than wasting time on endless hiring and firing activities.

You generally get what you pay for in life.  This certainly applies to staff and ‘pay’ is not limited to money, it embraces the whole spectrum of how people are treated.  There are clearly people who ‘want something for nothing’ in this world but there is no need to recruit those, or retain them if their attitudes change.  The vast majority of people want to work hard and make valuable contributions and this mindset is significantly strengthened if they are treated with respect and honestly, and paid what they are worth in the market.

Companies, even large ones, should not treat staff as temporary, unless there is a clear business requirement (e.g. one off event) to do so.  If a company treats its staff as permanent and applies a long term approach to the relationship, that attitude will be returned.  Obviously, many of us may not join an organisation with the intention to stay until retirement, but why shouldn’t a company make that assumption when it recruits people?  What could be the downside?

So what is Emirates going to do?  Attention on a number of issues is long overdue and, with a healthy amount of money to play with, there is now the perfect opportunity to act decisively.

- The staff survey needs to published, messages acknowledged and specific actions identified (and delivered, of course).

- The Group is in need of a major restructure.  A lot of the operational areas may work well, but support functions should be pulled together and thoroughly reviewed.  Opportunities for large efficiency gains will appear endless if a detailed review of activities, including a rigorous assessment of the value they add (or don’t add!), is carried out.  I hear of claims from staff such as “I have nothing to do”, “What I do is pointless”, etc.

- HR itself needs more than a review.  It has to position itself to do the job it was always supposed to do, but rarely did.  At least it appears the problem has been acknowledged, but real action is required.

- Management levels need a careful examination.  There cannot be many people in the group (other than those occupying pointless management jobs) who believe that Emirates does not have too many layers of management.  With fewer levels, reporting will have to be more focused and accountability increased.  I have witnessed an entire team of VP’s decline to make any decisions at a meeting, saying “we will have to wait for the boss” (who had been delayed).  And I know of another VP who is described by his team members as “the world’s most efficient email forwarding system”.  I could go on.

- I should not have to write this – treat everyone (all levels, up or down the organisation) with respect and maintain dignity, openness and honesty in all proceedings.

- Phase out the profit share scheme, but make an immediate and unambiguous commitment to increase the salaries of those in real need.  By ‘in real need’ I mean those who are adding genuine value to the day to day operation and to the bottom line of the business.  This will require a new remuneration policy, one that is much more considered than the ‘as little as we can get away with’ approach used to date and one that has staff retention as its cornerstone.  This ongoing commitment will be easily funded by the savings generated by the restructures described above.  The potential for savings should not be underestimated.

 

I suspect that this update may irritate a few people, but I am only trying to help.  I did write to Sir Tim Clark a while ago offering a few suggestions, even help, but he did not respond.  I gave up writing to Gary Chapman a long time ago because it seems he has no interest in my views.  I do not understand why.  If anyone has a problem with me doing this, I would ask them – “how would you fix the mess?”.