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The System of Survival

Pfg_eddie A lot of people ask me why I chose systems thinking as the topic for my next book.  What relevance does it have in this current economic environment?  It's a very fair question.  Given what is going on in the economy - at both a macro and micro level - a lot companies are being forced to make some drastic decisions.  But are they good ideas when examined under a "systems thinking" microscope?

Let's take Des-Moines based Principal Financial Group's decision to cut salaries across the board.  To their credit, they decided to cut pay on a sliding scale, with those earning less than $40K will get a 2% cut; those earning between $40K and $100K will lose between 4-7% of their pay.  Those earning more than $100K will lose 10% of their pay.  This decision follows a few rounds of layoffs over the past several years.  On the surface, this looks like an innovative approach so more people can keep their jobs.  After all, we all have to tighten our belts during this prolonged recession, right?

I've spent the last week talking to quite a few PFG stakeholders throughout the community (employees, former employees, consultants and contractors).  While Principal's communicated output is a lower payroll expense and the supposed saving of thousands of jobs, one has to wonder if they've considered all of the unintended outputs from their decision:

  • Company loyalty - Principal's culture is based on a strong system of employee loyalty.  Their organizational culture is very paternalistic with the implied contract being "If you show your unquestioning loyalty to us, we'll take care of you."  Now that implied contract has been broken in the eyes of many, so you can expect a rather large turnover from the employees when the economy improves.
  • Productivity - One look at Herzberg's motivational model and it doesn't take a lot to figure out that - while money doesn't motivate - a perceived lack of money can actually destroy motivation and productivity.  There has been considerable grumbling from many employees over this pay cut.  Don't expect major stock rebounds if people are too busy complaining to get their work done.
  • Community angst - Principal is considered a thought leader in the community when it comes to human resources and benefits.  On the positive end, they've helped further progressive issues like casual work attire and alternate work schedules.  However, you can bet there are now other companies in town eyeing their own payroll expense because of PFG's actions.  If Des Moines goes into a recessionary tailspin (we've been relatively insulated to this point), it won't be too hard where to point the finger.
  • Future recruiting - Iowans have excruciatingly long memories.  After this gets out into the marketplace, good luck recruiting at colleges or from other companies.  People don't want to go to work where money can be taken away.
  • Mediocrity survives - Having been in Principal's culture as an employee and as a contractor, I know of many employees and executives who have willfully damaged their bottom line (some brag about it).  To my knowledge, they are still there collecting a (smaller) paycheck.  Meanwhile, the ones who do care about making a difference are left scratching their heads.

Yes, on the surace, it looks like PFG is helping to save jobs and lower costs.  Peel away the onion layers and you have something that really starts to smell bad and make people cry.

And one system's output become's another system's input.  When you look at the big picture of how systems operate, you see how potentially lethal Principal's decision becomes to the economy of Des Moines.  Principal's slogan is that they'll "give you an edge."  I think the double-entendre of this promise will be very apparent in the coming weeks.


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Great Article!!!


Great article Tim.
I am very concerned that the senior management at PFG did not foresee or give the adequate weighting to the long term consequences of their actions.
I know there are employees that are considering getting a part-time job in order to continue to meet the needs of their families. The individuals that are now considering a 2nd job will have decreased productivity and long-term angst towards the company for putting them into that situation.
When the family budget is tight, and employees are already concerned about the economy, creating a trifecta by decreasing employee income could be disastrous for PFG when the economy rebounds.

It is good thing that a sliding scale wage cut was performed rather than a flat wage cut. However, lumping the cutting the pay of both the high performers and the low performer, was a poor choice. The high performers are those employees that the company should make sure they hold onto once the economy rebounds. By treating the high performers just like the low performers, I believe PFG will lose a lot of their high performers on the economic down term.
PFG completes performance reviews annually for all their employees. It would have made sense to me for the company to apply less of a salary cut or no cut at all to many of the high performers. This would have shown the high performers that the company appreciates them, and that since they have been faithful to PFG, PFG will in turn be faithful to them. Instead the people really working hard for PFG were reminded that they are undervalued by the company.

Timothy Johnson

OK, we're doing alphabetic pseudonyms, so I'm guessing I've hit a positive nerve with some actual Principal employees.

J - thank you for the kind words

X - as I said, the Principal Financial Group is going to learn a tough lesson (long overdue) about employee perceptions and that every action yields an equal and opposite reaction.

Crysta Wille

I hope there will be a follow up to this article in 3 months so we get "the rest of the story."

Timothy Johnson

I'll follow up as I get word, but I have a sneaking suspicion that this feedback loop will take a lot longer than three months to reveal itself.

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