#8-Is it time to be a Socialist Business, for a while…?

Last week my young friend Akash called me. His voice initially sounded feeble. No, it was not one of those Airtel moments!

In a hushed voice he told me – “Sir, I lost my job”. Even before I could react, his seething anger came through loud and clear on the phone – ‘at least they could have waited for a few months, given me some time; what was worse, they told me over Zoom’.

As his mentor, I tried my best to console him. But I soon realized it was best to allow him to vent.  Akash had got married few months back. His high paying FINTECH start-up had just got rid of what they thought were ‘high cost’ resources citing uncertain business conditions, with a 3 month’s salary as a severance package. He was one of the victims. 

As I write this, we enter into 3rd week of the lockdown and there is unease out there. There is fear of an impending economic gloom. Perhaps it just lacks a collective expression by employees and employers both in the organized and unorganised sector, since they cannot congregate. Some of them are working in the cosy comfort of their homes, while several have marched back to their homes, not knowing if and when the return will happen. There are many who ‘stuck’ wherever they are, counting their days- hoping for the best when normalcy returns. The question on everyone’s mind is – What is the new normal going to look like, will it be the same again? 

The Business in India (in fact, entire world for that matter) is still trying to figure out the extent of damage the lockdown has or going to eventually cause? Some still dare to hope for a quick re-bound while some hope not to think about tomorrow. Just live in the moment and survive for another day. 

For the Governments and economies across the world, the raging debate about virtues of sound economics like GDP and its growth, keeping inflation & fiscal deficit under control seems to have gone silent or falling on deaf ears. There is cry all around for the Government’s to splurge, spend and kick- start the economy. There is clamour from Business houses for the big brother to step in to reduce all sort of taxes, unleash tax holidays, extend interest and loans waivers and targeted sector specific incentives.  

But wait - most emerging economies including India are already operating with a fiscal deficit ranging from 3 to 5%. So, all this further ‘ask’ can only come by the Government happily printing more currency notes or just borrow more, internationally. Both of them have long term damaging consequences like raging inflation, debt trap of the type we have seen during 1991. 

Let’s come back to the Business world - both organized and un-organised. Right now, it appears like a bandaged wound. No one really knows the extent of infection and decay that has already occurred. Reality will unfold only when the bandage is removed, I mean when the lockdown is fully lifted. That’s when the Business will start to fathom the damage to their markets, demand, revenues and profitability. Of course, subject to a few specific sectors dealing with essentials like pharma, food grains etc. may sail through just fine.

The dilemma for every Finance Minister across the world will be – to what extent do they increase the fiscal deficit and just spend to ‘pump-prime’ (as the UN Chief Economist calls it) the economy? I think for the Indian economy, we should get used to living with a deficit of up to 5% of GDP for the next 2 to 3 years, for sure. The risk in the medium to long term will be creeping inflation; but that’s not an immediate worry though. But a fiscal deficit beyond 5% of GDP for India will spell doom in the long term.

As I write this, many C-HRO’s and CFO’s across the corporate world and many entrepreneurs are doing what they can; maintaining a stoic and brave face showing concern for employees. But many are also losing sleep over the burning question - how to retain the workforce and manage the most significant cost – compensation?

Here is a radical and Socialist thought on managing employment and its cost. But before I propose, promise me - you will not ridicule me for this crazy idea, seemingly impractical to implement!  Just let this thought sink in.

My suggestions are predicated on the following key aspects:

1.      Lockdown will be lifted either in phased or in a one-time manner in the next 30 to 45 days

2.      Trailing fear of possible re-lockdown would continue for the next 6 months

3.      Demand and growth will come back gradually after 12 to 18 months as the core demand and supply of good and services has only been supressed due to obvious reasons

4.      Most critical need of both Business and the workforce is to ‘survive’. For the workforce survival means – food, clothing, housing, health; For Business – continue to exist.

5.      Financial commitments, basic needs are lower for a younger workforce and tends to increase as you grow older due to family size, style of living etc.

Here are my radial social thoughts to manage employment and compensation costs:

1.      Suspend all current compensation levels for the next 12 to 18 months (max up to 24 months) and move to an ‘age’ related compensation model across all business having more than 100 employees. 

Let me explain. Irrespective of levels, experience and designation fix mandated salary bands related to age bands uniform across the nation.

Age: 18–24 - INR 20,000 per month

Age: 25 – 30 - INR 30,000 per month

Age: 30 to 40 - INR 40,000 per month

Age: 40 – 50 - INR 50,000 per month

Age: 50 – 60 - INR 60,000 per month

The above age and salary bands are purely illustrative and will need further study.

Notes:

-         Contribution to PF, ESI and Pension funds however to remain at levels that existed before moving into above compensation bands

-         Increase employee Health Insurance cover by 2x to 3x from current levels. Include dependent parents and in-laws in the cover

-         Implementation of the above mandated age wise compensation can be monitored by the PF office, as they already have the salary levels of every employee

 Implications of the above:

A. Compensation cost accounts for about 50 - 55% of the total cost of every Business and is also the most impacted expense line, and at risk. Due to bleak and uncertain business scenario, most business will either cut salary or let go employees. The classic reaction among corporates is for middle and top management to take salary cuts first (like Exide has done) ranging from 20 to 30%. This really does not help as almost 60% of the total compensation is accounted by about top 30% in the hierarchy. Taking this approach will not sustain and will eventually lead to job losses across levels leading to other wider social impact. Hence moving to age related compensation model leads to a Socialist and an egalitarian method of ensuring no one in the workforce is let go while the Business is trying to recover during this tough time. At the same time, this also ensures that all employees receive a mandated base salary to meet basic needs. Needless to say, the highly paid employee will need to dip into their savings for a short duration to meet their current living standards and other committed obligations (like EMIs for housing loans, personal loans, education loans etc.). Higher Health Insurance cover will take the anxiety around health costs in times like this.    

B. The above compensation model will ensure massive reduction in compensation costs for the Business, perhaps a reduction of almost 60 to 70% of the total wage bill. 

C. Hence, in the same breath I am proposing another mandated step; no Business to be allowed to book more than 10% profit before taxes (PBT).   I am deliberately not saying Cost plus 10%, as that may lead to loading of non-compensation costs to inflate profits and breed inefficiency and other leakages from the compensation costs saved. Mandated age related salaries and PBT can be monitored by the Statutory Auditors, Tax Authorities and SEBI (if listed). The Board of Companies/LLPs can be made accountable to ensure compliance to both. A contained compensation cost and a managed 10% PBT will lead immediately lead to the following benefits:

o  A forced price reduction of goods and services by the Business

o  Continued investment to grow capacity and employment

o  Other avenues of spend like company CSR

D. Increase mandatory CSR spend up to 10 – 15% of profits. A portion of this can be a mandated contribution to the State / PM Relief Fund in the event companies still have expense surpluses, after meeting 10% PBT but unable to invest in its own Business.  This will ensure such surplus funds from the Business is swept to Government coffers for broader welfare spends, steep and accelerated Government spending, sector-wise relief and more importantly - to do all this in the short term by keeping fiscal deficit under control to manage long term inflation concerns.

E. Obviously increasing taxes, both direct and indirect will be counterproductive at this time. With maximum 10% PBT, tax collections will be lower, more liner and predictable in the short term.

F. During this period of Socialist Business existence, Government can restrict dividend payments not to exceed 10%. With a PBT and maximum dividend restriction, we can expect the stock markets to be less volatile during this period. A further measure could be to restrict stock markets trading only to be ‘delivery’ based.   

G. Lastly, the government can decide to come back to ‘normalcy’ after 18 months (max 24 months) and perhaps make it co-terminus to end by fiscal year March 31, 2022. Thereafter the government can relax both the mandated age-related salary model and max 10% PBT and allow companies the freedom to go back to levels that existed prior to going into lockdown mode

Of course, all this is extremely Socialist and will need a law to be passed and monitored strictly. I have over simplified, but I am sure there will be several implementation challenges that will need to be thought through in more detail.

You must be wondering, this is crazy. But, hold on. Is this not better than….

-         allowing Businesses continue to pay the ‘highly paid’ and letting go mid/low level employees?

-         allowing Business to compete and kill each other during this phase?

-         watching Business and other operators to play with market imperfections during this phase?

-         allowing stock markets to play havoc?

-         having the Government of the day to go trigger happy just printing money to spend, to tide over this phase and leave a burden of raging inflation and fiscal deficit in the coming years?

-         having the country go with a begging bowl to borrow (even World Bank may have long Q’s of nations gone bust to borrow)?

-         Lastly, avoid a humanitarian crisis and strife, not so much caused by the virus but man-made economic disaster?

What I have suggested above seems unprecedented (for a capitalist state to become a Socialist for next 18 to 24 months). But drastic times call for drastic steps. India with 130 crore people, can’t the rich make a higher sacrifice for the poor masses to meet their basic needs like food, clothing and shelter? Aren’t these needs the same for all humans? The rich can ‘survive’ for 18 to 24 months digging into their savings or implement austerity measure to meet a ‘loss of pay’ for some time. When we can all ‘adjust’ working at home for a few months, can’t we adjust our finance for a few months - for the nation, for our people?

Am I overreacting - Thoughts?

Balu

+ 91 98451 80097

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