Retrenchment board vs the naked emperor

RECENTLY, two Zimbabwean firms, one listed and one unlisted, backed down from their decisions to retrench workers after the Retrenchment Board (RB), a statutory body mandated to vet non-public service retrenchment applications had given the green light.

In one of the cases, affected employees appealed to the Labour Court (LC) to uphold the RB’s decision. The LC backed the employer’s volte face act of Damascene proportions.
Apparently, on tallying the financial implications of the sanctioned retrenchments, the employers, belatedly, experienced an epiphany.  It made more financial sense to keep the employees than off-loading them, they learnt. In other words, there was no business case for the retrenchments!
Why go to the RB in the first place?  Perhaps, the more relevant question is: how did the RB fail to detect that these retrenchment cases were wishy-washy?
Section 12C (11) (a) of the Labour Act (28:01) (the Act) states: “In deciding whether or not to approve the retrenchment of employees in terms of this section, due regard shall be paid… that the retrenchment of employees be avoided so far as possible, where this can be done without prejudicing the efficient operation of the undertaking…”. This appears to be not the case in the two instances in question, hence the ignominious flip flops. 
It is not my intention to either pontificate on the RB’s sins of omission or cast aspersions on its competence. Instead, we propose the RB to ‘fail forward’— John Maxwell’s construction — the mindset that extracts dividends from mistakes.
Section 2 of the Act delineates retrenchment: “‘retrench’, in relation to an employee, means terminate the employee’s employment for the purpose of reducing expenditure costs, adapting to technological change, reorganising the undertaking in which the employee is employed, or for similar reasons, and includes the termination of employment on account of the closure of the enterprise in which the employee is employed”.
We shall suggest ways of tightening the RB decision processes surrounding retrenchment proposals weaved around the expenditure reduction argument.
Before anything else, the RB must insist on applicants presenting a rigorous incremental analysis showing the financial impact of the proposed retrenchment decision on business viability. Simply put, organisations should supply two financial scenarios: pre-retrenchment and post retrenchment. In business decision-making, incremental analysis is a basic requirement that senior managers are expected to do. Failure to do so is pure incompetence.
As a minimum, applicants should submit their remuneration policies to the RB. If applicants do not have any, the RB should refuse to entertain the retrenchment application. The purpose of submitting remuneration policies is for the RB to ascertain the extent to which applicants follow set policies. Any significant deviations from set policies that raise the remuneration bill should be justified on reasonable business grounds. In instances where the applicants’ remuneration policies prove to be unsound from a business point of view, the RB should ask the applicants to first align their remuneration policies with legitimate business interests.
We shall look at some of the most common unsound business practices that the RB can point out.

 

  • First, basing salaries on external competitiveness without proper job matching can lead to overpaid jobs. For instance, comparing jobs using titles is misleading. Jobs of comparable sizes should form the basis for benchmarking salaries. The RB should pay particular attention to senior managerial positions. In this regard, the RB should, in addition, require the applicant to supply the market survey schedules on which remuneration decisions were based on. Applicants must also supply the RB with job evaluation results used to put employees into salary grades that form the basis for benchmarking external competitiveness.

Should the RB find jobs of lower value being compared with higher value jobs, the applicants should be asked to explain the anomaly. The RB should then ask the applicant to correct the anomaly with a view to readjusting remuneration levels downwards, increasing the opportunities to either avert retrenchment or reduce the number of potential retrenchees.

  • Second, the RB must throw out applications for retrenchment based on the cost-containment argument in the case applicants fail to supply the most up-to-date job evaluation schedules. Job evaluation scores, and thus job sizes change as the organisation grows or shrinks. If an organisation does not update job sizes periodically and then uses outdated job sizes to benchmark salaries externally, cases of overpayment can arise.
  • Third, when a retrenchment occurs, many supervisory and managerial positions can be reasonably expected to be downgraded. This is partly due to reduced payroll budgets and the number of employees reporting. The RB should specifically see to it that post-retrenchment financial scenario schedules capture this. Downgraded positions should be subjected to either a cut or freeze of guaranteed pay.
  • Fourth, the RB should query any jobs being paid above the market median. If an organisation argues that it cannot afford current salaries and thus seeks to restore viability through headcount reduction, it should then justify why it pays above the median.

A struggling company with a 75th percentile market policy (paying salaries that are among the top 25% in its comparator market) should be asked to readjust its market policy downwards. The organisation could argue for the need to retain critical skills and hence the upper quarter policy. Such an argument should be thrown out. Not all skills are critical and thus cannot be paid in the upper quarter. Critical skills can still be paid at a premium, that is, above the policy level while still paying non-critical skills at a lower policy level. The premium should not be guaranteed. The RB should insist on applicants supplying evidence of regular reviews of skills criticality to justify the continuance of the premium.

  • Fifth, an analysis of total remuneration to income ratios should form a key part of the RB decision regimen. Well-run organisations have total remuneration to income ratios for their executives (top 5) below 2%. Any applicant with a top-five executive remuneration to income ratio above 2% should be asked to readjust accordingly. Nothing personal, just business.
  • Sixth, unsound pay progression policies can inflate the salary bill. Progression based on length of service should come under scrutiny. Service-based progression means one moves up the salary scale based on the number of years of service irrespective of performance. Whereas that may be pragmatic for the public service, it may not be appropriate for profit-seeking entities. Pay progression based on performance is more pragmatic. Non-performing workers, that is, those that fail to meet agreed benchmarks should receive just an inflation-matching cost of living adjustment (cola). Cola plus a performance premium should be for those meeting and exceeding performance benchmarks.

Admittedly, the RB cannot dictate on this, but can recommend applicants to adopt more business-like pay progression policies.
In short, the RB must send strong signals that it will not entertain any wishy-washy retrenchment applications. Organisations should not be allowed to hide behind a cosseting of weak management.
If the emperor is disrobed, the RB should diplomatically ask the emperor to cover their nakedness.

  • Share your views on this matter at brettchulu@consultant.com.

 

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