With Kevin Jenkins / 24 April 2020
This article was first published in The New Zealand Herald on 7 April 2020.
Commentary about the impact of COVID-19 has been rightly focused on keeping people safe, on the recession, and on the grim prospect of lots of Kiwis losing their jobs.
The conversation is also turning to how we work together to return to prosperity and what Aotearoa might look like in that new world.
In the meantime, what I’m seeing up close is how small and medium business owners and leaders are responding. When I say “see”, I mean see it in the faces of the other members of The Colin Meads Club, one of the thousands of video meet-up groups that New Zealanders have been forming so we can all stay in contact.
We have a “video beer” every few days. The first one — on the first Friday of the lockdown — was a mixture of ghoulish humour (most of us aren’t that far off the age groups most at risk), and a much more earnest conversation about how to keep people in jobs and businesses afloat.
The essential/non-essential divide
Club member Len’s* Auckland factory manufactures products for the building industry, and it’s currently locked down. Worse, the factory also has no forward orders, so even if the lockdown were lifted tomorrow, the future of Len’s 200 staff would be uncertain at best.
By contrast, John’s farm supply business continues to be busy through the lockdown, as it’s classed as essential. Most of his 70-odd staff are working full hours on full pay, and will be working Easter Friday. It’s not right across the business though — some operations have been closed, with about 20 non-essential staff not working.
It’s a mixed picture for Rakesh’s company, which supplies the marine and broader transport industry. March was a good month, and many of his clients provide an essential service.
Many other clients don’t though. Rakesh’s business will survive but it may be a lot smaller if non-essential economic activity doesn’t pick up later in autumn. He has talked to his several dozen staff about pay cuts, which will probably start with Rakesh himself. Like most businesses, he has moved to daily cash flow tracking and will decide about the prospect of pay cuts very soon.
Consulting about pay cuts
Ten days ago The Colin Meads Club talked about how Roger, the CEO of a regional airport, had already started consulting with his staff about a 20% pay cut.
The airport’s revenue has mostly evaporated. Aeronautical revenue (terminal space rentals, landing fees and so on) and commercial activities associated with that make up 85 per cent of the airport’s revenue — this has completely gone. The remaining 15 per cent comes from commercial property leasing, and this is also coming under pressure from tenants either exercising their rights to cancel for non-access, or seeking rent relief to remain at the airport.
With the current COVID-19 regulations the airport is losing about $150k cash per month to cover remaining fixed costs, despite management’s diligence in removing or reducing all non-essential operational and previously planned capital costs (including reducing staff costs).
The airport is a lifeline utility airport, which means it has a statutory responsibility to maintain full capability, being on standby for medivacs and civil defence. That includes a cost of $50k per month for certification of its rescue fire services alone.
The directors of the airport company had already agreed to take the 20 per cent pay reduction themselves. The principle here, of course, is that a universal pay cut is better than 20 per cent of people losing their jobs. This harks back to similar stories from the Great
Depression, and shows how Kiwis — both employers and employees — have retained values to do with looking after each other.
What does an across-the-board pay cut mean?
But what does a 20 per cent pay cut mean exactly? How does it relate to the complex web of shift work, part-time work and casual work? And is it just a pay cut, or does it mean moving to a 32-hour week?
Employment lawyers are expressing their usual range of views about the extent to which employers can impose changes on their employees. The members of the Club are all good employers, and in consulting with their staff they are not just complying with the letter of the law but also acting in its spirit.
But what happens if a small number of people don’t agree to a pay cut? Does the employer agree to some exceptions? If so, should those exceptions be transparent? And what impact would that have on company culture? Or should the employer reluctantly turn to the restructuring option?
These questions are further complicated because some people, like Roger the airport CEO but also other staff with particular skills, are working harder and longer than ever to keep their businesses afloat.
While some staff may reject the idea of sharing in the pain for the greater good, the overwhelming feedback from staff across the firms has been a willingness to work together to keep as many people in jobs as possible. This is a credit to the values these companies have engendered, and to the Kiwi spirit of working together.
Lots of pay cuts already
With revenue gone, the workers and managers of Len’s building products factory agreed to pay cuts of between 30 per cent and 40 per cent (with no nominal reduction in hours), and the cancellation of any short term incentives (i.e. ‘STI’ or bonus payments), about the time the lockdown began.
With most staff unable to work from home, and with no production contracts anyway, this may be the definition of “hibernation” the economists are talking about.
Len has taken the pay cut himself of course, and also carries the burden of looking for contracts to keep 200 workers employed into the future. That’s a heavy weight to carry.
Ben is the director of an executive search firm. As with Roger’s airport, revenue has dropped 85 per cent, and staff at Ben’s firm have taken the option of moving to a four-day week and a 20 per cent pay cut. Unlike Len’s factory though, they retain a healthy order book.
However, clients aren’t yet pushing ‘go’ because they have no idea when ‘normality’ will return and they’ll need to fill vacancies.
When pay cuts aren’t enough
Part of our Club’s earnest conversation has been about what happens if the business, at least in its current form, becomes unviable. Reports of redundancies are increasing and some horrific scenarios have been posited.
No members of the Club have made anyone redundant yet, and all are desperate to avoid that. But they are also all keen to be open with their staff and involve them as much as possible in what is needed to stay afloat, which includes facing reality.
One theme I’ve heard from a few people is very moving. For example, one mate started a consultation process with his 40 staff, beginning with an all-staff meeting just before lockdown — the tough message he wanted to share face-to-face was that the company had no choice but to make about a third of the staff redundant. But during the consultation process he was quietly approached by lots of individuals offering to sacrifice their own jobs because their colleagues needed their job more.
In some cases that was because a colleague was on a work visa, and losing their job also meant having to leave New Zealand — possibly to return to a country where the COVID-19 pandemic was more advanced. This is all further evidence of how Kiwis are concerned about each other.
The government subsidy — a saviour
So how does Len, our building products manufacturer, keep paying his staff with no revenue? Like the other firms represented in The Colin Meads Club, his factory has some financial reserves, the owners may be able to kick in some operating capital, and he may be able to borrow.
The main reason though has been the government subsidy. The stories around this have been very impressive: one firm I know of in the tourism industry had $150k deposited in their bank account the same day they applied for the subsidy.
John’s farm supply business is lucky enough to be looking for staff. All the other members of the Club have either applied for the subsidy or are looking very closely at doing so.
One of our Club chats considered the impact on businesses if the lockdown continues beyond four weeks. Some thought that another subsidy could well be needed to help otherwise healthy businesses survive, and that a signal from government on this sooner rather than later would reduce significant stress for owners and leaders and give staff a sense of security.
Looking ahead, Rakesh, the transport industry supplier, is also asking his key managers to present two scenarios for their parts of the business: first, showing how things look after Level 4 is lifted in two to six weeks’ time, as business will be different; second, showing what business changes will need to be made if after three months we’re still in a Level 3 or 4 state and customers are not active.
With pay cuts and job losses rippling through the economy, the Club employers are acutely aware of the impact on consumption, as people who aren’t paid well can’t buy stuff. They are good employers and want to either maintain full pay or get back to that as soon as possible.
At a regional level, economic development agencies (EDAs) have responded with a range of measures to support small and medium businesses. “Response” is the first of the “4 Rs” of emergency management and, like the country’s EDAs, the Colin Meads Club are also thinking about the other three Rs — that is, how their businesses will recover, how to be more ready for another pandemic, and how to reduce risks to their business if that happens.
In the meantime, the Club will continue to honour the spirit of storytelling, resilience and camaraderie that Sir Colin epitomised. We will also support the New Zealand craft beer industry.
The names of the members of the Colin Meads Club have been changed in the spirit of the Chatham House Rule.
About the author
Kevin has undertaken a wide range of assignments in the science and innovation, economic development, and tertiary education sectors — for example, work on the establishment of Callaghan Innovation (New Zealand’s advanced technology institute). He has worked a lot in the justice sector, including leading a major programme targeted at leveling off the increase in the prison muster, and another at ensuring that the cost of the sector is stabilised.
Kevin is a regular contributor to the New Zealand Herald.