Covid-19: The Real Reason Cult.fit Fired Its Employees
On May 1st, around 1000 employees of Curefit Healthcare Private Limited, an Indian fitness company, were forced to resign, citing poor business due to Covid-19. Meanwhile, the company has raised Rs. 832 crores (USD 110 million) in funding just 2 months ago, and last year, the founders took home a total salary of Rs. 83 Lakhs each.
This is just one example. Companies around the world are laying off employees left, right, and center. While management is pointing to the balance sheet and blaming coronavirus, we realized that the root of the problem is something much more serious.
How did we reach this point? Companies have been around for 250 years now. We’ve found solutions to problems we didn’t even know we had, discovered multiple ways of increasing productivity of employees, toyed around with hundreds of theories of management, been through at least 5 major global financial crises and a hundred minor regional ones, but we still have not figured out how to take care of our most prized stakeholders- our employees- when times are bad.
And why do you think that is? Because we never wanted to. It was never a priority.
What’s The solution?
We need to make a special reserve — a unique fund that is fundamentally different from the ones we otherwise make. Unique in identity and methodology. It is money to be set aside when times are good, to be specifically used when times are bad, so employees do not have to be laid off. The only way to make it work would be to have strict rules on its usage- it shouldn’t be treated as a general reserve or a labor welfare fund.
Why should we do it?
Laying off inefficient employees when the business doesn’t have money isn’t illegal, so you aren’t doing anything wrong. Then why should we do this? Because to build a good business, being ethical is as important as being legally right.
If you still want to stick to your “legality” excuse- answer this- how many times have employees gone over and above their employment contract because the business needed it? Worked for 12 hours a day? Taken an extra shift? Worked a weekend? In most cases, if an employee refuses to work on a busy weekend, the company will lose a substantial amount of business and customers.
Read this part carefully — what happens with profits currently would be absolutely fine IF the profits were ONLY a result of the business logic and decision making structured by the board — profit is supposed to be a reward for entrepreneurship. But that isn’t how it works. ALL of the profits made ARE NOT a result of the business theories structured by the board, there’s something extra employees do, that they are not contractually obligated to — that leads to a portion of these profits. And this surplus effort of employees is never recognized and financially acknowledged. Time to change that.
How do we calculate it?
Since this reserve will have an extremely specific use, it only makes sense to have a specific calculation as well. This is what we propose:
The reserve should be capped at an amount equal to 3 months’ pay of 50% of the average basic salary of middle management and 70% of the average basic salary of non-management employees.
The logic: if there’s a time in the future where companies can not pay salaries, the reserve should have enough money to pay middle management and non-management employees for 3 months at least, while the business recovers.
We’re assuming that non-management employees will take a 30% pay cut and middle management will take a 50% pay cut during a crisis, hence the percentages.
Let’s take a reasonably large sample size — a company that has 25 mid-level management employees and 200 lower-level employees. Let’s say the mid-level management earns INR 1,00,000 per month (USD 1312) and the lower-level employees earn Rs. 35,000 per month (USD 460). The amount needed to be kept aside would be:
(*Note: These are exploratory numbers taken from the public announcement made by Cult Fit about salary cut figures. Companies can play around with the numbers as they deem fit and use it as a tool to showcase job security and attract talent. The government can set certain base limits that private companies must adhere to. Not all employees are equal, we recognize that the time invested by an employee must also be recognized. We believe it is reasonable to set aside 1 month of reduced pay for every year spent at the company, capped at 3months.)
This amount will be contributed by top management as a fixed percentage (say 10%) of their bonus every year. After a few years, the reserve is bound to reach its cap, and then this contribution will no longer be required. It’s a win-win. In our example, the cap is reached in 8 years, after which management need not provide for this reserve.
Why should top management pay for this from their pockets?
Another unique feature of this fund is that it isn’t a DIRECT deduction made from profits. It is tied to the BONUSES that management pays itself, for a job well done. This is because most growing companies run at massive losses, and pay themselves huge bonuses anyway because success is determined by revenue, not profits. A majority of costs are variable (such as marketing, you can reduce it easily), and it is easy for such companies to become profitable by simply reducing their costs. In 2018–19, Curefit spent a whopping Rs. 38.69 crores on marketing.
It’s important to understand the Profit and Loss Statement before we dive deeper into the fund because companies point towards these books as being the genuine reason for firings — they say that the money simply is not there, which is not true.
At the end of the year, there are essentially three things that happen with surplus money (i.e. Profits) — they are reinvested back into the company for its growth, THE BOARD GIVES ITSELF MASSIVE BONUSES, or they are (partially) given out as dividends to shareholders. Or a combination of these three. The profits are there, just not in the books. They’re in the private bank accounts of the board members.
Employee Safety Fund is only funded when management decided to give itself a bonus. It is essentially sharing the success of the company with the employees, an incentive for their surplus effort which is not acknowledged financially. This stops silly PR stunts like CXOs taking no salary (or a dollar a year) during tough times, only to sneak in hundreds of thousands of dollars as bonuses for themselves at the end of the year.
As mentioned before, the directors of Curefit Healthcare Private Limited took home Rs. 83 Lakhs each last year, even though the company is making losses.
The CFO of OYO Rooms took home Rs. 2 crores last year, and again, the company is still making losses.
The reason we mention these figures is that management compensation packages are made up of base salary and large bonuses. Only the bonus element should be used for the purposes of this fund. It will encourage a more transparent compensation package, and more careful thought will be put into bonus packages.
Both these companies are currently laying off a lot of employees because technically, according to the balance sheet, the company does not have money.
If you’re paying an insurance premium from your earnings to protect your family, giving up 10% of your bonus to protect your work family is extremely reasonable. It’ll barely make a dent in the pockets of top management but will help hundreds of people survive bad times.
Edit — Quite a few people have asked me to add this in: the fund should not sit idle with the management. It should be invested in safe instruments like FDs and government bonds to help soften the blow of inflation. This is a good point.
Co-written by:
Sundeep Goswami and CA Mahalakshmi Reddy,
CEO and COO of Fitlete (Exxe Fitness Pvt. Ltd.)
