Tuesday, March 24, 2015

Be generous to your employees

DURING my 23 years with Shell, I was once posted in 2003 as chief executive officer to Shell Middle Distillates Synthesis (M) Sdn Bhd (SMDS) in Bintulu, a company that had been in the red for about 10 years.

Radical changes were necessary to turnaround and we had to get everyone – from managers to security guards – on board and raring to go. To do this, I triggered the “virtuous cycle” to break the “vicious cycle” that had created a defeatist mindset.

We conducted labs, where we decomposed the profit and loss (P&L) statement by products and customers, and identified key profitability levers for each P&L statement. We translated high-level strategies into detailed three-feet programme of action.

During implementation, we pursued what I call the DMS model – Do it relentlessly, Monitor it constantly, and Solve problems recursively.

Big on the agenda was to reward staff who delivered results. Teams and individuals who captured product and customer profitability were rewarded via special “Code 40” bonus. The logic was simple and compelling. For example, if a manager and his team in charge of selling diesel were able to contribute, say, RM20mil profits to the Diesel P&L statement, the team would be paid a bonus that month. It was not difficult to justify giving a cash payout of RM500,000 for the team.

In only six months, we delivered the company’s first profit in a decade. Everyone went home with fatter paychecks and an IPod each, which was the rage at that time.

A Dutch Shell engineer had, on my first day as CEO, challenged me to a wager of RM100 that I will fail to turn a profit. In six months, he lost. His letter and his RM100 still hangs to this day in the hallway of the Shell Bintulu office.

When I was at Malaysia Airlines, we did the same. We had more than 100,000 flights a year.

We actually had P&L statements for each flight – a mind-boggling and gargantuan task for our finance team to produce. I have not heard of any other airline in the world that produces P&L statements for each flight. Most airlines produce route P&L statements but not on individual daily flights.

When a MAS revenue and sales team had successfully turned around a loss making route to profitability, we immediately gave them the special “Code 40” bonus.

I know I have my fair share of critics. They spin falsehoods that I made profits in MAS merely by selling assets. Let’s puts the record straight – when I joined MAS in December 2005, we had only 2.5 months of cash left in the coffers. Meaning, if we did not generate additional cash by February 2006, we would not have enough money to pay staff salaries and buy fuel for our planes.

That was why we had to sell some assets, including our MAS headquarters for RM130mil. Our cash burn rate was RM200mil a month!

Let’s be clear – we DID NOT make a profit in 2006, my first year at MAS. That was the year we booked the proceeds from our asset sales to our P&L statement. In the subsequent years of 2007, 2008, 2009 and 2010, the company made profits. No asset sales in those years. Profits in these years were not as a result of asset sales.

Profits were made because the revenue and sales team implemented actions to improve yield and load factor to impact flight and route profitability. And they were generously rewarded.

Allow me now to return to the strategic moral of the stories and the implications for our country and companies in Malaysia.

I am a strong believer that being generous to employees conspires success, where good salaries and bonuses drive up productivity and lead to better results.

In fact, this is a common practice in developed nations, and I am confident that adopting such a practice will help our country to not only move towards high-income status but drive up productivity as well.

For Malaysia, the compensation of employees to gross domestic product was 33.6% in 2013 but in line with our high-income aspiration, the Government encourages the private sector to gradually increase it to 40% in the long term.

Some surveys reveal that Malaysian employers are not doing too bad. The newly released annual findings of the Hays Asia Salary Guide shows that 43% of Malaysian employers surveyed intend to award more than 6% salary increases for the upcoming review to their employees.

Additionally, the latest Malaysian Employers Federation’s survey suggests a slightly higher forecast for salary increment of 5.8% in 2015 (2014: 5.4%).

These are encouraging indicators from the employer’s side but, of course, more can be done.

Meanwhile, on the Government’s part, the Economic Transformation Programme (ETP) was introduced to promote high value-added economic activities which require quality investments. This, in turn, creates more opportunities for high-skilled, high-paying jobs.

Here is another fact to chew on. It is difficult, if not impossible, to find a high-income, developed nation with low labour cost. Productive employees in a knowledge-based economy will be paid higher salaries.

The larger question would be this – will Malaysians’ disposable income be greater than our cost of living?

The answer so far is that we are on the right track because salary increase is greater than inflation.

Since the ETP’s launch in 2010, more than 1.8 million new jobs have been created under the larger economic universe.

The preliminary 2014 Household Income Survey by the Statistics Department show that in 2014, both average and median household income have grown by 8% and 8.5% respectively, outpacing inflation at 2.3% (see chart 1).

The situation with the bottom 40% offers even more hope – income has risen higher than the overall average at 9.9% (see chart 2). Clearly, economic transformation is gradually reaching the masses.

Favourable results are one thing but we have a long journey ahead of us. Malaysians’ employers absolutely have to do more to ensure equitable income and wealth distribution and use this to incentivise productivity.

Going back to my Bintulu days, in 2004, the Shell Group challenged my team by declaring we should become the official supplier of diesel at the Olympics in Athens. This was not going to be easy, given the many refineries in Europe were best located to supply fuel to their neighbour.

Together with Shell Group, we made the bid, and won. From that point, I think the team had the feeling that we were unstoppable. The company maintains profitability to this day.

In my years helming corporations, I have come to realise there is no sure-fire way for results other than inspired and productive people rolling up their sleeves and leading the charge.

If you are quick to recognise and generously reward people, the good karma will come back to only serve your organisation in more meaningful ways, going beyond the balance sheet.

Datuk Seri Idris Jala is CEO of Pemandu, the Performance Management and Delivery Unit, and Minister in the Prime Minister’s Department. Fair and reasonable comments are most welcome at idrisjala@pemandu.gov.my.



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