(Authors: Noël Bonneuil and Manuela Martini)
Research Applied summary provided by Barbara Dartt, Family Business Consulting Group
Utilizing data from one family-owned French firm (Cavella), the authors study these questions:
- In this firm, does merit, seniority, family relationship or national origin influence labor cost?
- How much do regulation and economic conditions interact with other influencers to affect labor cost?
The study included interviews with surviving firm managers and econometric analysis of the firm’s very detailed pay registers from 1946 through the firm’s closure in 1985.
External factors influenced this firm’s labor costs and overall performance. First, in 1950, the French government established the guaranteed interprofessional wage. Around this time, French national collective agreements introduced detailed pay scales that guaranteed both a minimum wage that was higher than other Western countries as well as additional protections. One of these protections was that employers had to provide valid justification for worker lay-offs. Second, regional construction demand had several boom and bust periods over the four decades studied.
Cavella employed 8-15 employees in the 1940s, peaked around 30 employees in 1975 (immediately prior to the oil crisis) and then maintained around 20 employees through the late 70s and early 80s until the firm’s insolvency in 1985. The firm retained employees with low skills for entry-level positions but also hired higher-skilled folks as demand dictated. The firm did hire immigrants throughout its life – from Italy, Portugal and North Africa. Managers or foremen in the firm were almost exclusively family members of owners.
The authors found that family relationship, seniority and national origin did not influence pay rates or raises. Instead, base pay and pay increases appeared to be based on ability. The authors hypothesize that, “… its size forced the managers to respond to the market, favoring skill over other considerations.” The logic of the market drove merit-based pay.
The firm did not have a formal personnel policy and, therefore, wages and raises were also heavily influenced by the firm’s values. Good relationships with workers and the desire to retain skilled workers seemed to drive managerial decisions. In addition, in this small firm, differential raises and incentives were quickly known by the entire labor force, causing complaints and potential conflict. Managers shifted to raising “everybody the same, to avoid all that fuss…” Somewhat in contrast to the above finding, the logic of relationships also drove compensation. The authors indicate that at Cavella, “…the most productive workers could not be paid as much as they should have been, and the least productive workers could not be paid less…” Bonuses became disconnected from the economic reality of the construction industry.
It is difficult to draw too many applications from a study that follows one family-owned firm. The authors indicate the firm failed in part because its labor costs outpaced labor productivity. This conclusion could also encourage the reader to draw more ominous lessons than might be warranted from a sample size of one. However, three key findings could be useful for practitioners and family businesses:
- Discussion to align the compensation approach could be time well spent for family-business leaders. Hard and fast rules aren’t likely to be helpful. However, going through the process with managers will likely result in much clearer expectations for managers to communicate and employees to follow.
- Measuring labor productivity is important. Even if this firm’s demise resulted from something other than lack of labor productivity, it was very unaware of labor productivity relative to labor cost.
- Many family businesses are very careful not to give compensation advantages to family members. In this firm, there was no pay differential for family members. However, having clear policies around what are the benefits of being family could help in attracting passionate and long-term team members.
Cavella’s had not articulated its compensation philosophy. As illustrated above, compensation was guided by both employee merit and managerial desire to avoid conflict. This lack of formality around compensation is common in firms of this size who resist “bureaucracy” in the name of getting the “work” done. The findings here indicate that what drives the informal compensation in firms is indeed complex and isn’t easy to create a comprehensive policy around.
About the contributor:
Barbara Dartt is an FFI Fellow and a consultant for the Family Business Consulting Group. She can be reached at email@example.com.