Furloughs and Other Cost Savings in Government and Nonprofits

Governor Schwarzenegger made headlines announcing that state offices including the Department of Motor Vehicles would have to take every other Friday off to save money. No one can doubt the savings. The problem is the method. DMVs in many states have improved their customer service greatly, but others are known for their distinct lack of customer care. Finding the door closed every other Friday is going to anger the public. If two days off each month is necessary, and I have no doubt that it is a flexible furlough where employees choose the day they take off helps retain customer service and give employees some control over a very difficult time. (The governor may indeed be building in savings of reducing heating or air conditioning on those days.)

Governor Schwarzenegger is not alone in furloughing employees. In most service organizations, the cost of employees is the major cost of doing business. Furloughing is a very reasonable idea. The reduction in pay is relatively small for the state employee. If you assume that about 1/3 of the pay for every 8 hours is taken up in taxes, then for every $100 an employee earns, they are losing $66.00. And even then they are continuing to earn their vacation, health insurance, sick-time, pension and that the same rate they normally do. Benefits including mandated benefits such as worker’s comp and unemployment insurance constitute about 30% of the salary in the private sector (somewhat less for nonprofits) and 34% for the public sector according to the Department of Labor. That is for every $100 the employee earns, benefits may cost the employer another $30 to $34. So during those days off the employee is still earning.

But in the long run, governments and nonprofits may want to look at institutionalizing “furloughs.” In one hospital I worked in, it was called vacation without pay. Most offices have down times. That often occurs around the holidays when yes, employees would like more money to pay for Christmas and other gifts, but they also need time off to run errands. Institutionalizing vacation without pay or low need time policies makes good sense, particularly as we continue to worry about an aging, expensive workforce. Baby boomers are the individuals who might want to take time off voluntarily. Or this can be institutionalized as part of reverse seniority systems, asking the most senior people if they would like to take time off first. Again, benefits are still registered as though the employee was still working. Some organizations such as universities are slower in the summer, others in the winter. Employees can be encouraged to take “vacation without pay” during those times.

Another possibility that will save much more money is to change the workweek. Most of us work a 40 hour work week. There is no reason that the work week can’t be 39 hours, getting off one hour early on Friday, or 371/2 hours, or even 35 hours. I have seen the effectiveness of thirty-seven and one-half work weeks even in hospitals, organizations with shift work. The traditional shifts require a costly half-hour overlap, 7-3:30PM, 3-11:30PM, 11-7:30AM. In the 37 ½ hour scenario, employees do need to be responsible and call in early if they are going to be late or are ill, but this is not unreasonable. If there are real concerns that this would make salaries uncompetitive (probably not a concern during the economic downturn), then benefits can be computed as though the person worked the traditional work week.

In the end, these changes to wages and hours must be negotiated in unionized workforces as is the case for most government agencies and increasingly in nonprofit hospitals. But this is not insurmountable. And these ideas are much more palatable than the temporary reduction in pay mandated by Maryland state government. Union members want to keep their jobs and they want the organization to succeed. Fairness is the key and government, hospital executives, and other nonprofit executives may wish to demonstrate their support by taking vacation without pay or voluntarily cutting back pay to the equivalent of the 37 ½ work week.

Pay and Wall Street Executives

The news has been filled with discussion of Walt Street executive bonuses. Each of these executives received their bonuses even though their companies were failing and now receive special federal government funds. The executives have been attacked for the huge size of their bonuses, but the attack is probably misplaced. It is the boards of these companies that deserve our criticisms. They make the decision how to compensate executives. Once the form of bonus is determined and how it is to be earned, these boards are contractually obligated to provide these bonuses.

Of course, the boards could have tried to renegotiate, and, of course, the executives could have offered to not take the bonuses. But neither took place.

The reason for providing these bonuses, at least as portrayed to the public, is bonuses are needed to retain these executives. Many on Wall Street are underpaid, comparatively speaking, to other executives, and the bonuses make up for low pay. But there’s the rub. Bonuses are supposed to be a form of pay for performance. The better you do for the company the more money in stocks and cash you are paid. Thus, the more successful the company is, the more of a bonus the exec should be paid. So if a company is going under, then the exec should receive nothing.

The Board shouldn’t want to retain the executive. There is no need for a retention bonus nor a bonus to make up for lower pay. Surely, there are other employees in the company or in another company who might like the opportunity to bring back the company from this down time.

Bonuses or other forms of pay for performance do tend to make people work hard, at least initially, but then employees grow to expect them year after year. They become complacent. The bonus has to increase and increase spiraling well beyond what will motivate, if indeed it is motivating. Given that these bonuses seem to be largely unrelated to how well the company is doing, they are incredibly absurd as an incentive for these Wall Street executives.

It is time that boards begin to recognize what they are doing and take responsibility. They have a fiduciary responsibility to manage the company properly. Though those of us looking on must feel these bonuses are immoral and unethical, it is likely that the executives feel some guilt about receiving these bonuses, but after the guilt begins to diminish, I’m sure they are busy spending them and expecting to receive another next year. Given that we have not heard of boards taking responsibility for this financial mess and executives giving back pay, it may very well be that the future legislation must micro manage and figure out means to restrict bonuses. When a government agency does wrong a consent decree is established giving a court appointee representative the right to oversee the activities of the agency. This is an extreme response, but maybe we do need an appointee to work with these boards to help them understand their responsibilities to their shareholders and the public.