Well-off chiefs turn to charity

Some chief executives, chastened by rising anger over executive pay and bonuses, are setting up charities, giving away money or waiving their salaries.

Senior managers at Porsche and Volkswagen, who made millions on the back of controversial share price gains, have led the way with charitable donations.

Wendelin Wiedeking, chief executive of Porsche, earned almost €80m (£72m) last year at the German sports carmaker, drawing scorn from some in Germany. He has set up two charities with €5m each to help needy families in the small German towns where he grew up and now lives. “Hopefully that will take the heat out of this debate and we can concentrate on doing our job,” he told colleagues last month.

Executives at VW who also benefited from wild share price movements in Europe’s largest carmaker agreed to give €2.5m to a civic foundation to help children. The donation, which amounted to 10 per cent of their gains from cashing in on stock options, was publicised by press release.

“We were very worried about the negative publicity of the top executives doubling their pay when the rest of the economy is doing so poorly but this was the perfect solution. Who can criticise giving money to children?” said one senior VW manager.

Some executives have responded to anger over their salaries by offering to work for a nominal €1 or $1. They include Rick Wagoner, CEO of General Motors, and Postbank’s Wolfgang Klein, who had drawn scorn for earning €3.3m after taking government aid for the lossmaking German bank.

High-earning managers have long been a source of funds for charity. Philip Richards, co-founder of hedge fund RAB Capital, advocates paying a tithe to charity.

But not everybody agrees public displays of charity are the best way to win back the public trust that business leaders have lost. Alessandro Profumo, chief executive of Unicredit, one of Europe’s largest banks, thinks self-publicising philanthropy creates the wrong impression: “I think people should give to charity privately and not publicise it. It doesn’t create the right impression.”

Jorma Ollila, chairman of Nokia and Royal Dutch Shell, says it can help win back respect as long as it does not look like an afterthought. “The best thing is if you don’t do it after the facts but that it is an ongoing feeling,” he says. “Philanthropy is one way [to regain public trust] but it needs to be part and parcel of what you do every day.”

Unemployment is above 2m in Britain and heading for 3m. The number registering as jobless is rising faster than it did in the previous three recessions. Companies are cutting hours and freezing pay. As the pain spreads, fear of job losses is becoming the biggest issue on the political landscape. A much-hailed “flexible” labour market, built up over 30 years, is facing its sternest test.

“The flexible labour market was one of our stonkingly good competitive advantages and, if we don’t maintain that, we are dead in the water,” says Digby Jones, trade minister until late last year. The Labour government, Lord Jones now says, is not doing enough to help companies retain their skilled workers during the crisis.

He has joined the chorus of voices in industry demanding wage subsidies to encourage companies to opt for short-time working rather than axe permanent jobs, in line with similar schemes in the Netherlands, Germany, France, Italy and Spain.

A cash-strapped government is resisting that idea, which it fears could be wasteful and inefficient. Nonetheless, Alistair Darling, the chancellor of the exchequer, is preparing a “Budget for jobs” next week that will direct whatever limited funds are available towards training and helping people back into work.

But what does labour flexibility really mean and how much might it help countries to come quickly through a recession? The UK, while more lightly regulated than some continental counterparts, is far from a free-for-all. There are laws against unfair dismissal and Labour has introduced a minimum wage, extra statutory holiday and more generous maternity and paternity leave. Sometimes it is described as an “Anglo-social” model.

John Cridland, deputy directorgeneral of the CBI employers’ organisation, cites four elements of flexibility: the ability to hire and fire easily; the ability to adjust wage levels; workers having skills that allow them to perform a variety of roles within organisations; and their being mobile enough to take jobs in different sectors or parts of the country.

“Traditionally in the UK we have relied on flexibility in hire-and-fire and wages to make up for weaknesses on the skills side. In contrast, Germany has less flexibility on numbers and wages but much more on skills and productivity,” he says.

To this can be added a relatively liberal immigration regime, which allowed the UK to continue its economic boom by recruiting migrants for hard-to-fill vacancies. That is becoming a source of tension as native and migrant workers fight for a smaller number of jobs.

Then there are the government’s “active labour market policies”, which combine stricter welfare rules with measures to encourage people back to work. The government plans to spend £500m ($732m, €557m) on “golden hello” recruitment subsidies for employers but is under pressure to launch a more extensive public job creation scheme.

In many ways the flexible labour market is working as it should. Workers have proved willing to accept pay freezes and shorter hours to save their jobs. At this stage, although unemployment is rising sharply, there is a two-way flow: a quarter of a million left unemployment in February and found jobs, a 20 per cent increase on a year earlier.

“I think the underlying labour market is performing reasonably well, though a big downturn like this is clearly going to put pressures on the system, particularly the welfare system, in the short-term,” says John Philpott, chief economist at the Chartered Institute of Personnel Development. “My hunch is that we should see quite a strong labour market recovery when the conditions allow, precisely because we have a flexible market and we don’t have too many underlying structural problems.”

Many analysts forecast job losses of about 1.3m during this recession. While this would be painful, Oxford Economics, a consultancy, points out that it would be below the 1.71m lost in the 1990s recession and 1.79m in that of the 1980s. This recession could, of course, be deeper. The European Commission puts UK unemployment at 6.4 per cent of the workforce, below the 7.9 per cent European Union average but rising faster than most.

Among employers at the sharp end, views about the health of the flexible labour market are distinctly mixed. Stuart Fell, chairman of West Bromwich Tool and Engineering, which makes pressed steel components for the motor industry, has benefited from being able to use workers from employment agencies in order to adapt to peaks and troughs. His workforce has come down from 146 to 73 since October but only 27 of the job losses were redundancies among permanent staff.

However, he fears unions will press the government to go further than it has agreed in implementing the EU’s agency workers directive, which it must do by 2011 – so that temporary and agency workers would not only be given the same basic pay and conditions as permanent staff after 12 weeks in a job but also rights in other areas, such as redundancy pay.

He is annoyed at the government’s failure to implement a short-time working subsidy or to adopt what he would consider an adequate industrial strategy and provide appropriate skills training – by which he means turning out fewer hairdressers and florists and more engineers. “The government is being a bit duplicitous when it says how wonderful our flexible labour markets are,” he says.

Ian Malcolm, managing director of Elring Klinger (GB), based in Redcar in north-east England, which makes engine components for European carmakers, says the market is “not working as well as it should be”. He has cut his workforce from 130 to 87 and moved to a three-and-a-half-day week, but complains that the way the system of tax credits for working people and families is structured means staff can lose out if they go below 30 hours. Referring to the government’s recruitment subsidies, he asks: “What is the point in giving employers money to take staff on when the reverse is happening and we are having to lay off staff?”

Simon Topman, chief executive of Acme Whistles in Birmingham, which makes whistles for sports people, police and musicians, has deferred pay rises but so far staved off short-time working and redundancies. He complains about the cost of making people redundant, the risk of claims for unfair dismissal and increasing red tape.

James Reed, chairman of Reed, the recruitment company, sees a brighter picture. While permanent job vacancies handled by his business are 50 per cent down on last year, the market for temporary staff is holding up better – down by only 9 per cent in February compared with a year ago. Hours worked in human resources, science and technology and accountancy are going up.

“Employers want to keep their options open because uncertainty is so great. The flexible workforce works very well in helping them do that,” he says. But he warns: “Over the last decade there has been a lot of regulation, such as working time regulations. The flexible labour market has adapted very well to them. Whether that will continue in a very different environment is something we will find out.”

Trade unions have accepted pay freezes and short-time working where the alternative is redundancies. But Richard Exell, senior policy officer at the Trades Union Congress, complains that some business people are “talking up the number of pay freezes” and adds: “The last thing we want to do is anything that will dampen demand in the economy.” The TUC wants not only a short-time working subsidy but also, as part of a £25bn public investment stimulus it is seeking from Mr Darling in the April 22 Budget, a programme to create temporary jobs for the unemployed – like the “community programme” that was among the welfare-to-work successes of the 1980s.

Calls for such a scheme are growing. Lord Layard of the London School of Economics says it is “excellent” that the government is keeping up the intensity of advice for jobseekers and maintaining welfare rules, but argues that something extra is needed to avert a re-emergence of long-term unemployment. He and Paul Gregg of Bristol university are calling for a “job guarantee”, whereby fallback jobs would be provided for young people who have been unemployed for 12 months and adults unemployed for 18 months – jobs such as maintaining schools and hospitals or in social care. It would cost £2.5bn in 2010-11.

“Unless you do that, it is very difficult to maintain the whole welfare-to-work ethos. That in the end depends on being able to test a person’s willingness to work,” Lord Layard says.

Will Hutton, chief executive of the Work Foundation, a think-tank, says the government must act as employer of last resort and warns that unemployment could reach 4m or 4.5m. “If you are an unskilled 40- or 50-year-old or if you are 18-24, the labour market is not working for you,” he says.

Business organisations, meanwhile, fear recession will result in new regulation. David Yeandle, head of employment policy at the EEF manufacturers’ association, says: “There is a real danger that, because the City and the banking industry need tighter regulation, that message might spill over into other areas such as employment.”

Employers’ bodies cite pressure to improve redundancy pay, the question of when and how the agency workers’ directive will be implemented and calls for a significant increase in the national minimum wage from October, which they say would increase costs in hard-pressed sectors such as retail and leisure.

Horst Feldmann, an economist at the University of Bath, warns that the minimum wage, which has had a relatively benign effect since it was introduced a decade ago, will “bite more” in the downturn and increase job losses or prevent people from being hired. He adds: “I hope the UK keeps its fairly flexible labour regulation. Once we are through the trough of the crisis, countries with more flexible labour markets will perform better.”

‘We can do things that were impossible a few years ago’

Continental Europe has long been derided for the inflexibility of its labour markets. But there is little doubt that many companies across Europe entered the current downturn with far greater flexibility than in previous recessions – thanks to a wide range of devices.

These include government-backed schemes such as short-time working, a greater willingness from some trade unions to offer concessions – and new ideas such as “time accounts” that let companies make employees work more in the good times and less in a downturn, all for the same pay.

“We have much stronger labour flexibility today than we had traditionally in industry,” says Ingar Skaug, chief executive of Wilh. Wilhelmsen, the Norwegian shipping company. “There is a much better relationship between unions and management. People are prepared to take pay cuts voluntarily or reduce their hours.”

The closer relationship does seem to be focused around Germany and countries in the Nordic region where workers are involved in the running of the company through positions on boards. But companies across Europe are benefiting from extra flexibility.

Carlos Ghosn, chief executive of Renault and Nissan, says the crisis is helping to introduce measures once dismissed as unrealistic. “We can do things that a few years ago we could never have done. A shorter working week was not possible. Lower pay too. Europe is going to have to advance, to help people and companies,” he says. Such progress “is much needed in Europe and this crisis is helping to push that”.

The main measure that tens of thousands of companies across Europe are using is short-time working. From Cartier in Swiss luxury goods to the steel operations of ArcelorMittal in Bosnia, companies are embracing schemes that allow them either to reduce workers’ hours or lay them off temporarily while the state pays a proportion of their wages. In Germany alone, about 700,000 workers from 28,000 companies are in the scheme.

Virtually every European country except the UK and Greece has some kind of short-time working. But the concern is that it is designed to deal only with temporary dips in demand. If a dip turns permanent, companies have to fire those workers, often after months of inactivity. Wolfgang Clement, a former German economics and labour minister and now chairman of the Adecco Institute, frets that not enough is being spent on retraining workers while they are idle. An official at France’s CFDT union says: “We are concerned that temporary lay-offs are just a precursor to permanent ones.”

Jorma Ollila, chairman of Nokia and Royal Dutch Shell, worries that if the recession is deep, shorter working will run into problems. He is especially concerned about national budgets, saying: “It is a costly way for governments to buy time.”

If economies pick up sooner rather than later, many flexibility measures may hold. But if the recession drags on, do not be surprised, says one leading European businessman, to see “millions of job losses as reality catches up with business”.