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Reflexite Corp. Share the Pain to Share the Gain

June 1, 1996
Related Topics: Downsizing, Finance/Taxes, Workforce Planning, Featured Article
Calling a layoff at the first sign of financial stress is a little like getting a paper cut and calling the paramedics. Just as minor problems shouldn't elicit drastic measures, short blips in an organization's financials shouldn't be the catalyst for a layoff.

At least that's what Reflexite, a company that produces reflective materials for various uses, thinks. While company managers concede you shouldn't just take a Band-Aid™ approach to financial problems, they do say that keeping an accurate pulse on the strength of your company's financial viability will help you avert layoffs—or at least make them a last resort—if you have the right plan, and the right resolve.

Reflexite Corp. managers came to this conclusion when they were faced with a financial downturn in 1991. Although the Avon, Connecticut-based firm that sells reflective materials used for everything from jogging shoes to highway signs wasn't losing customers or market share, the company faced declining sales as a result of the economic recession. It was cause for pause, but not yet a cause for alarm.

In fact, the company went to great lengths to avoid laying off any of the organization's 350 employees worldwide. The firm's president and CEO, Cecil Ursprung, went against the grain in suggesting that there was a better way to cut costs than cutting people out of jobs. He and his staff defied the predictable pattern of Corporate America by figuring out how to fix the problem before employee layoffs were necessary.

What resulted was a two-part plan to cut costs. It included temporarily cutting pay companywide and instituting voluntary leaves of absence. Then the company developed another innovative strategy, called the Business Decline Contingency Plan to get a handle on tumbling revenue.

The organization's commitment to valuing people reflects a mindset that stems from what's now seen as somewhat of a cliche for human resources professionals. But Reflexite really means it: People are its most important asset.

Valuing people is a commitment—and a tradition.
In the firm's early years, the men who originally started the firm, "The Rowland Brothers"—Hugh and Bill as they're affectionately known—fell into some hard times. Rather than passing on the problems to the rest of the company, however, the founders made some personal sacrifices, such as taking out second mortgages on their homes. More than once, they were close to laying people off, but didn't. There was always another way to avert the problem.

Later, when times were good, the Rowland Brothers had a chance to sell the company for quite a tidy little profit, but worried that doing so might result in massive layoffs of the existing staff by potential buyers, such as 3M. They also had no assurance that any of the potential buyers would keep the company—and jobs—in their native Connecticut. They felt they had been successful because of the brilliance and hard work of their employees. So, instead of selling to an outside buyer, the brothers sold the company to the employees. In 1985, Reflexite became employee-owned through an employee stock ownership plan (ESOP). Employees now own 59% of the organization.

"That's the unique part of our culture, but that's not the main reason why in '91, when things again were tough, we didn't lay people off," says Matthew J. Guyer, who's the director of operations for Reflexite North America, with responsibility for human resources matters. While disrupting people's lives and livelihoods is reason enough to think twice about laying people off, the strategy not to do so goes beyond that. "Our company president believes philosophically and ethically that laying people off is the wrong thing to do," says Guyer. "But all emotion aside, from a purely cold, calculating business opinion, it was much more expensive in the end to lay people off because no one ever forgets [a layoff]." It becomes part of corporate memory and individual motivation—or demotivation—as the case may be.

He explains that if your business is ultimately viable, it will grow back to profitability with the right nurturing. When that happens, you'll probably need to hire people back, which can be expensive in terms of recruitment, training and time it takes for new hires to overcome the initial learning curve. But in the long run, you can never buy back commitment once you lose it—at any price.

"What Ursprung believes is that as soon as you overreact by laying people off, you add this whole new atmosphere to the company in which people aren't coming to work everyday solely worried about the competition and taking care of customers," says Guyer. "They now become distracted by wondering: 'Am I expendable? Am I going to be the next one to go?'" It starts a chain reaction the likes of which few companies are prepared to deal with.

"A lot of company executives make the mistake of not counting people and their knowledge as assets the same way they do with their equipment," adds Guyer. He points out that companies don't throw out equipment when things get slow. So why throw away people? It's like throwing out the baby with the bath water. He says: "Employees are worth a lot more than their hourly rate."

Everyone takes a pay cut.
So, when financial problems surfaced five years ago, instead of cutting people, one of the first actions the company took was to cut people's pay temporarily. Everyone's pay. In fact, the senior management team took a 10% cut in salary, middle managers took a 7% cut, lower-level managers took a 5% cut and all other employees took a 5% cut in the form of one day off per month without pay. On those days, the plant closed.

Because Reflexite is an employee-owned company, it's perhaps easier to align the needs of the shareholders and the employees because they're one and the same. "However, I think that also puts a little extra burden on management to do a good job because we're looking at our shareholders every day. We talk to them. We see them. We know them," explains Phil Ferrari, Reflexite's chief financial officer. "But we also believe in sharing the pain—and sharing some of that pain from the higher-end (stakeholders) down to the lower-end (stakeholders)."

The reduced-wage phase was implemented for about six months. "That helped reduce the payroll a little bit," says Guyer. Everyone's salaries immediately returned to normal after the self-imposed sanction period was over. Employees even were given a rebate on a portion of the withheld wages once profitability kicked in again. The organization continues to use a variable compensation plan based on profitability. If the company isn't profitable, nobody gets their monthly "owner's bonus"—which is figured as 3% of the company's operating profit, divvied up by shares.

Voluntary leaves of absence help reduce expenses.
Another cost-cutting measure the company implemented in 1991 and again in 1995 when it began to experience another down-turn was a voluntary time-off program. "The voluntary time-off program was something we coordinated with the state, having people voluntarily go on unemployment for a period of time—anywhere from one week to two months," explains Guyer. "We handled all the paperwork for them, but it was purely voluntary."

Workers who took a leave maintained full benefits, seniority and owner's bonus rights. They also had a guaranteed return date to the company.

More than 90 workers participated. Some people took the opportunity to take time off to go on vacation with their families during the summer. Others took off a week here or there just to chip in and do their part to help the organization get back on its feet.

The strategy worked. It helped the company save more than $400,000 in payroll costs during the 1991 financial downturn alone. Guyer says it worked out well because it helped occupy people's work time more fully while they were on the job. "So people weren't bumping into each other trying to find something to do," he says.

The combined strategies of pay cuts and voluntary leaves of absence produced a 17% budget savings during the 1991 downturn. But the company needed another tool to help itself through other financial and business concerns.

Plan for contingencies.
Just because you want to keep people on staff, you still need a swift diagnosis and a cure for financial ills. The worse the company's problem, the more aggressive the approach should be to fixing it.

Reflexite managers came up with a business model they call the Business Decline Contingency Plan. It's a four-stage diagnostic tool that helps senior managers assess how bad the financial picture is and what to do about it. Laying people off is last on the list.

Business symptoms are outlined at each of the four stages, along with actions to be taken and expected results. For instance, if sales go below what the firm anticipates for a certain period of time, say, four consecutive weeks, and the salespeople confirm that sales are sluggish and their profits, in fact, come in under projections, the plan outlines what the next step should be. The more serious the symptom, the more drastic the measure.

"Our company president believes philosophically and ethically that laying people off is the wrong thing to do."

"When we developed the plan, we wanted to make sure we'd have the right action for the right situation," says Ferrari. "Basically, the plan tries to outline what the decline is with some set of criteria. Is it a short-term problem? Is it long term? What's the duration? Is it a market concern? Is it a short-term dip? The purpose is that we make sure we match the response to the type of decline it is."

The second purpose of the plan is to serve as a good communication tool. "One of the things we believe in at Reflexite is communicating properly to employees," says Ferrari. "If they see what the conditions of the decline are and what the appropriate responses are, then they develop in their own minds what's going to happen. So it takes some of the surprises out." Some surprises everyone can do without.

"We do a layoff only as a last resort," he adds. So far, the company hasn't had to deploy that strategy. "A layoff can be a knee-jerk reaction. We try to stay away from that," says Ferrari. "We look for other areas of savings."

Communicate financials—in good times and in bad.
For years, Reflexite has shared financial results with its employees, but the extent to which everyone has inspected them with fine-toothed combs has increased in recent months.

During a downturn, the first thing that senior managers do is sit down with employees and tell them—"Here's the situation." It starts getting people together to come up with some creative solutions to their problems, such as cutting back on travel, deferring new hires, running machinery more efficiently, postponing new buildings or keeping fewer raw materials in stock temporarily. While they have a corporate objective to run as lean as possible, there are always ways to trim the fat. "We've been a pretty successful company, but no matter how conscientious you are, when you're making money and stock prices are going up, there are always some things [you can cut back on]," says Guyer. You just need to look carefully at all business aspects.

Communicating the need for employees to watch the comings and goings of the business is essential. Of course, at Reflexite, employees have a vested interest. But with an objective system that helps people understand certain business conditions require certain solutions—which aren't always quick fixes—there's a good chance that any company can enjoy a healthy run for the money.

And this one has. Reflexite has been profitable every year since 1991. In 1992, sales hit $30 million; and in 1995 the company projected $50 million in revenue (actual 1995 figures aren't available). "We believe our success demonstrates what sharing ownership and decision-making can achieve," says Ursprung. He believes that if you give workers some power and some say in how the business operates, they'll repay the company a thousand times over. That's reflected by the company's financial success and the fact that in 1992, the organization won Inc. magazine's Entrepreneur-of-the-Year Award. And, the firm has also been featured in the U.S. Department of Labor's "Guide to Responsible Restructuring."

For Reflexite, financial problems have brought to life both the best of times and the worst of times. While the staff may have experienced the worst of times financially, the challenges have drawn the staff closer together to work out their problems as a team. That has given them renewed energy to leap forward with relentless vigor—to find remedies you can't buy in a bottle. Now that's a healthy solution to any problem.

Personnel Journal, June 1996, Vol. 75, No. 6, pp. 91-94.

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