Are hourly engineers profitable?

In this edition of In the Trenches, Acme considers turning its engineering department into a non-salaried division.

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Acme's flagship product, trimethyl flubdub, is that shiny, purple, gelatinous miracle goo that's been used in everything from foods to water softener resin and oven cleaner. The product and its many derivatives represent about 75% of the company's traditional revenue stream. For the past eight months, though, sales on this cash cow have been as soft as a Dali clock.

In the Admin Building, three executives with urgent issues on their minds huddle in the ostentatious conference room.

Louis Jange, Acme's CFO, opened the discussion. “Sales are down; profits are down. We need to focus on more cost-cutting measures to make up the difference.”

“Sure, and when sales are down, production goes down. Go figure,” replied Teddy Beare, the plant manager. “We've downsized the staff already. Too much, in my opinion. Even with the reduced production schedules, the plant people are working nearly 46 hours per week. They're complaining about it, but they're certainly not complaining about the overtime pay. The folks in the engineering department are working even more hours than that.”

“Nevertheless,” crowed Jacques Boute, the human resources manager, “my records show that overall productivity is up and profitability per labor-hour worked has risen 12% during the past year, I'm sure we could do even better than that.”

“Yeah, sales are down,” said Teddy. “What do you expect when we lay off nearly a third of the sales force? Don't you think we're entering a vicious circle, spiraling into a mad crash and burn?”

“Forget the business philosophy, guys. It doesn't matter,” answered Louis. “You know very well what Old Man Acme meant by that comment at the executive staff meeting last Friday. In case you missed it, he wants profits to go up, no matter what. I think he feels his stature in the local business community is on the line, and he's not going to take a fall.”

“What significant cost is there left to cut?” asked Teddy. “You want to start slashing everyone's pay?”

Jacques's eyes lit up. “You might be on to something there. After all, we don't have a union to worry about.”

“I was joking,” replied Teddy. “You can't do that to the people in the shop. They'd never stand for it. This place will be swarming with union organizers the minute you try it.”

“Not the production people,” answered Jacques. “I meant the engineering and support staff. Why are they getting overtime pay? They're supposed to be professionals, right? They're supposed to be paid by the job, not by the hour. Isn't that what's behind the meaning of the word salary? I'm just suggesting we freeze this labor expense at a lower level. Put them on straight salary, no overtime, no pay increases for the foreseeable future, at least until business picks up.”

“That's going to improve your hourly profitability figures even more,” chirped Louis. “Although it's not going to solve the whole budget crunch and put us on the road to Acme's profit goals, it'll help to fill in the larger potholes. I like it.”

“Wait a minute here, guys,” choked Teddy. “That's not going to work. The engineering effort out in the plant is the only thing separating us from disaster. That equipment is highly specialized, as are the people running it. These folks know how to make it work and work well. If they decide to walk, it'll be impossible to train a new crew rapidly enough to recover.”

“Don't sweat it,” replied Jacques. “If you think the economy is bad, the job market is worse. Where are they going to go? Most of what they learned here probably won't transfer to anywhere else. They might beef a bit, but they won't leave. Trust me on this one.”

“OK, folks, let's make it happen,” concluded Louis as he rose to leave. “Old Man Acme will be pleased.”

A plant engineer says:

Poor Acme, with people in executive positions who are making quick decisions without much thought that the total possible outcome profits might be down for a while. A quick unplanned meeting with no forethought to the subject is called to make a major decision. Acme has a problem like many other companies — sales and profits are down. The work that needs to go into a plan to raise profits and cut cost should be only one part of the overall plan. Good companies always will be looking for ways to cut costs. Seldom are those ways based on the wages of the employees who are still working.

Teddy is the person closest to the people in the plant. He said downsizing has gone too far and the existing staff is working too much overtime to make up the difference. His point was mostly ignored. Teddy’s statement of fact that the sales force has been cut by a third was mostly ignored. Facts aren’t important to Louis; his only concern is that profits must rise to meet the owner’s expectations. He forgot the part about “no matter what.” If these executives would take time to think, they might find many better avenues to greater profits than on the backs of the staff that provide the production skills to make the profits they have now. Teddy tries to bring up a final point when he suggests the importance of the engineering staff to the overall process effectiveness. He’s once again shot down. So, how viable is the solution? I think it’s doomed from the start.

The potential short-term problems are many. Too much overtime often can cause employee fatigue that can lead to mistakes and injuries. These alone place Acme at a greater short-term risk. In the long term, the fatigue can cause quality problems that might not show up for months and might not show on the books for a year.

To cut the salary of those responsible for making quality products seems like a poor way to increase profits. The three executives failed to look at options other than wages. Jacques seems to know the numbers of the workers very well. How about the numbers for the sale force? How many sales would be generated if half the laid-off sales force were put back on the street? Does the HR manager know the crossover point between hours of overtime and the equivalent in additional personnel? Maybe adding a few folks back on the payroll will get the existing staff out of an overtime situation, relieve some stress and increase productivity. I don’t believe the plan that these three hatched will prove to be a good one for Acme in the long run. If followed through, the profit reported for the next quarter might go up slightly, but look out for the following quarter.

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