Trust, as we know, takes a long time to earn and build. But if you want to destroy trust, that can be arranged in a couple of minutes. And that is as true in business, as it is outside of it.
So how then must employers manage employee trust, given not just the fundamental ideas of fairness and integrity, but also productivity – which hinges on trust to a great degree?
Jan Li and Niko Matouschek, two Professors at my alma mater, investigated this in the context of “relational contracts”,
Such “contracts” cannot be quantified or written down (at least to a lawyer’s satisfaction) the way, for instance, a sales agreement might be: Sell $100,000 worth of our product and get a 5 percent commission. Instead, relational contracts represent more casual understandings between management and labor about things like performance bonuses.
[Do these contracts really matter, if a contract is not really a contract unless there is paper to back it up? I think they do…especially in the context of employer-employee relations, where naive employees or employees without a lot of power (hello unions) implicitly trust their employer to “do the right thing” in exchange for productivity, especially over the course of many years.]
Anyway, the research, which forms the basis of an interesting article in Kellogg Insight, starts off not in the abstract, but with a very specific business situation in a real company, Lincoln Electric.
When Donald F. Hastings took over as CEO of the welding-supply manufacturer Lincoln Electric in July 1992, he anticipated a little time for celebration. But literally less than a half hour later, the new executive’s bubble burst: The European operations of his Cleveland-based company reported $7.5 million in losses, which, added to losses in Latin America and Japan, made for a devastating overall $12 million second-quarter plunge in assets. “I could imagine the headline in the local newspaper,” Hastings later recalled: “New CEO at Lincoln Electric Fumbles in First 24 Minutes on the Job.”
Hastings remembered how his thoughts then “raced ahead to December” 1992, when the company would be expected to pay out millions in bonuses to its 3,000 American workers. Year-end bonuses had long been Lincoln’s style, comprising more than 50 percent of the company’s often $70,000–$80,000-level salaries. Small wonder that Lincoln’s workers signed on for life and the company dominated its market. So, on that July day in 1992, Hastings had to decide: Set a possibly dangerous new precedent by borrowing to pay the bonuses, or not pay them and undermine worker motivation?
The full article talks about Mr Hastings’ decision, and describes the Professors research in more detail. Anyone in business, not employers and principals, may find it worthy of a read.