Copyright © 1994 - 2008 Ethan A. Winning, All Rights Reserved
Preface: Well, I thought I'd heard everything -- I always do -- until I got the following email question from a woman in Pennsylvania: "I do a lot of traveling for my company. In fact, I'm gone a couple of weeks out of each month. Don't you think my company should pay for boarding my cat?"
Okay, that sets the stage for this article, originally published in 1994. It's just as valid today, especially considering how many new businesses are being established, how many might fail because of "overcompensating" (in one way or another), and the seeming plethora of employees who want -- and may get -- all manner of benefits which were never conceived of before 2000.
"paternalism n. A policy or practice of treating or governing people in a fatherly manner, esp. by providing for their needs without giving them responsibility."(1)
In view of current downsizing, rightsizing, and Martinizing, you may find it peculiar that I'm going to address problems with paternalism (or maternalism, if you prefer...or just "ernalism" if I have to be politically correct) in smaller companies.While paternalism has vanished from larger companies and diminished in mid-sized ones during the last five years, it still exists. Many of my clients are start-up, family-operated, and small organizations with fewer than fifty employees, and in those companies, paternalism certainly does exist.
In the past decade, I've watched (hell, I've hung on to) the pendulum which swings from giving employees everything to giving them nothing. Before the pendulum begins its swing again toward the more benevolent arc we should discuss the pattern which emerges slowly and then may "spring full grown from the head of Zeus."
"Paternalism" may not be the most appropriate word to use in the context of this article, although it has been a tenet of management or style since the days of the mills on the East Coast a century ago. What we are addressing, in part, is the "country club" management style, so named in the late 1960's.
There are many pitfalls in being paternalistic, the worst of which is the lack of consistency which ultimately comes from using such a style or of a manager being paternalistic. Other problems which occur are over-staffing, over-compensating, allowance for "empire building", and allowing poor performance to be the norm.
We see paternalism in smaller companies, and usually in those just starting out. The CEO in his way believes that one must actually over-compensate in order to attract the most qualified people. Then, in order to retain them, he also provides every benefit the company can (or cannot) afford. For example, most financial institutions, just five years ago, paid for all the employees' insurance and most often dependent coverage as well.
As institutions prospered, when necessary to cut expenses, the dependent coverage was eliminated or the employee had to pay part of the premium for such coverage. But, sometimes ESOPS and promises of profit sharing became popular to assuage the CEO's conscience regarding benefit cutbacks.
Concurrently, as the institution prospered and staffs grew, the CEO was further removed from those employees who helped start the company and from newer employees.
Example: Paternalistic managers are noted for making promises. A paternalistic manager tells the staff that, "One of these days, we're going to have a retirement plan, and all incumbent employees will be vested from date of hire." The institution doesn't make a profit and no plan is instituted. Is there a contract?
A contract is "an agreement between two or more persons which creates an obligation to do or not to do a particular thing. Its essentials are competent parties, subject matter, a legal consideration, mutuality of agreement, and mutuality of obligation."(2)
There is probably no obligation to follow through, and therefore there is probably no contract. However, if the manager says, "You will be given a bonus at year-end" and no obligation on the part of the employee or employees - other than continued employment (See Walker v. N. San Diego County Hospital) - is implied or expressed, then there is a promise and a contract does exist. The payment of that bonus is costly. To prove that a contract does not exist is costly. Either way, this style of management usually and ultimately produces more costs than profits.
Example: A profit sharing plan is adopted, with the largest portion given to senior management, the latter usually consisting of those who had been with the company the longest and had received their promotions along the way. When a disproportionate number of senior managers are white males (under the age of 40) and they are receiving the bulk of the profit sharing, one has by definition a prima facie case of discrimination.
Example: The CEO finds his Executive Secretary as indispensable. He gives the secretary promotions, salary increases, and bonuses rather indiscriminately. Another executive's secretary, who happens to be a minority employee, is not paid at a comparable rate. Again, discrimination. Over-compensation.
Example: In order to keep staff "happy", there is an across-the-board Christmas bonus. Some of the employees have not been performing up to (unwritten and sometimes unknown) standards. Poor performers at a particular level or with particular lengths of service are given as much, proportionately, as those who are excellent performers. Lousy management.
Example: One manager rates his employees as "outstanding" on a regular basis. Without any investigation as to why these outstanding performers haven't contributed to the institution's profits, the "fair-haired" manager's employees are given merit increases which may not be based on merit, which are inconsistent with known productivity and performance, and which puts the entire wage and salary system out of kilter. In addition, such inconsistency leads to dissention and other employees complain. Taken to an extreme, one could again have discrimination.
The costs of paternalism can be staggering in relationship to the income and size of the organization. Taking the last example, rather than freezing wages for those who have been overrated, the correction is usually to raise salaries and grades to match. If the discrepancy is only 7.5%, this could mean an additional operating expense of $60,000 - $80,000 even for a smaller institution. Further, by giving such increases, even though we call them adjustments most employees think of them based on merit.
Performance ratings by a paternalistic manager are selectively higher than what they should be. Because of that, salary increases may be higher than what written policy calls for. Paternalistic managers usually avoid negative situations, including that of rating the poor performer. Aside from the disparity (unintentional discrimination, but intent has nothing to do with winning or losing a claim) in the resulting aftermath, not only are salaries too high, and not only are other employees upset about disparate treatment, but in order to have an institution or individual department be productive, one must hire three poor performers to do the work of one excellent one. This has a snowballing effect which ultimately has to lead to layoffs. What follows is a "worst-case scenario", but we've seen this enough times to stress the point.
Now the CEO or manager must decide who to lay off, and based upon all these outstanding performance evaluations (and not one negative one on file), this is a difficult choice. But the decision is made and out of 28 employees to be laid off, 21 are women, 16 are minorities, and seven are men. A large number of claims of discrimination since 1986 have come from such layoff situations. (And, as just reported by the Bureau of Labor Statistics, age discrimination claims arising out of downsizing are up 46 percent since June, 1993. More important, not only are the number of claims up, they are being seriously investigated.)
Perhaps the saddest words to hear from the paternalistic CEO is, "After all I've done for them, and this is the thanks I get!" Appreciation is a fleeting emotion and, while trite, employees still ask, "What have you done for me lately?" Paternalism is a no-win style of management. Not once in all the years I've been consulting has an employee told me that he is underworked and underpaid. Invariably, come November and December of every year I get calls asking what the market rate is for a particular job and whether or not an increase is possible (though not necessarily warranted).
So, what's it all mean? It means that paternalism leads to unequal treatment of employees, increased costs of running an operation, a good possibility that monetary losses will be sustained, incongruent and inconsistent performance appraisals, and perhaps even a retreat from the realities of the real world of business. And, oddly enough, when one thinks that paternalism is used as a style to keep people satisfied, it often leads to disgruntled employees in acrimonious settings.
1. The American Heritage Dictionary of the American Language, 1987.
2. Black's Law Dictionary, 1985