The Great Risk Shift

I have been toying with the idea of a concept I call The Great Risk Shift.  I’m doing this because the practice of shifting risk is one of the great underlying themes of everything i’m researching and writing about.

One of the core tenants with business is to spend as little as possible to make as much as possible.  The difference is called profit.  It’s the very reason why business exist.  No complaints here about a company out to make a buck.  There is one cost of doing business that is an intangible, but a very real cost.  The cost is called Risk.  One of the things that almost all professionals understand on some level is the idea of a cost associated with risk.   We see it in our private lives every day.  The easiest way to quantify a cost associated with Risk is simply looking at your insurance payment for anything you have covered.  Insurance is, by default a payment for shifting risk.  We understand that shifting risk is valuable every time we buy an insurance policy for our house or get an extended warranty on our phone.  The thing is the professional class is becoming the insurer for the company.  If there is a problem we foot the bill.    

So how have companies moved Risk away from themselves?  It’s quite fascinating to see all the ways because shifting risk has become a highly nuanced art form.  This shouldn’t be a surprise as it has been perfected over the decades of the industrial age.  Here are just a few biggies on the great Risk Shift.  

There was a time that if you traveled for the company, then the company gave you a company car.  This made sense in that it was very practical.   Imagine if your a small start up and you’ve got a sales or service route.  Your growing so you find someone you trust with a good work ethic and you give them your car to do do the job while you work on creating a new route or growing the business.   More profitable routes, more employees, more company cars.  Hey, Mr. Small Business man, guess what…  You’ve got a fleet!  There are some benefits to having a fleet. You can manage costs, your vehicles have consistent appearance, you understand the best ways to leverage the vehicles, etc..  But there is risk associated with maintaining a fleet.  What if business takes a dive?  What if people leave?  What if the insurance goes up?  What if there is an accident? Over time fleets went out of favor for these very reasons.  The company car slowly became a car allowance.   This moved the risk of the vehicle onto the individual.  In truth it’s not better for the company to do this.  My favorite quote I found in an older fleet management article is:  

The majority of industry studies reach the same conclusion: reimbursement programs that compensate the employee fairly for all expenses will cost the company significantly more than company-provided vehicles.

Did you see the problem with this quote?  ‘Fairly for all expenses’.  How many companies actually compensate the employee fairly for all expenses?  Risk, is an expense, and i’ve never, ever seen risk in a reimbursement calculation for vehicle reimbursement.  Fuel, maintenance, repairs, insurance, etc.. that’s all part of it, but Risk? Never.  How many Runzheimer plans include a payment for the gap when the employee has to return the vehicle because they lost their job or decided to make a move in their career and don’t need the big SUV to haul around the test equipment that was required for the old job?  Answer: Zero.  You can just use a junker, right?  Well no, plans like Runzheimer’s specify a minimum vehicle type.  Then there is the inevitable grey market style requirement where the boss comes to you and says “That car looks bad, if your going to work here you really need to get… -insert flashy corporate culture approved new car with payments here-  I know from personal experience that is a heavy incentive to put yourself on the hook for six years of payments with no guarantee the company will provide that vehicle expense for six years.  

Another area that I have been researching is the current status of retirement programs.  There is an amazing amount of information available about defined benefit (pension plans) versus defined contribution (401K).  I’ve argued that both of these types of programs and social security (the three legged stool) is required to have a ‘good retirement’.  What I didn’t really delve into is that the entire point of the 401K’s rapid adoption by business was that it shifted the risk of retirement onto the individual.  The more pooled your risk, which is the basis for pension plans not to mention every insurance plan on earth, the less the individual exposure is to something bad happening.  Ideally the 401K was supposed to just make the workers retirement portable but it hasn’t achieved that goal.  In fact it’s lead to a critical national problem that will apparently affect multiple generations.   Employers benefit by not having to shoulder the liability of an employee’s retirement account years after they have moved on.  They have literally limited their Risk to the last payroll date.

What about other expenses:  I think the worst offender is the credit card companies who issue ‘corporate cards’ that you have to apply for.  Imagine this.. As a condition of employment at a large company, you have to have a corporate card where the bills go right to the accounting office.  You not only have to apply to be approved for the card(personal credit check) for business expenses but you don’t see or control the billing and timely payments in any way.  Maybe the bill doesn’t get paid because some crazy accountant who’s under intense pressure to not allow any unapproved expenses kicks back your $25/per meal expense allowance because it was actually $25.75 (yes, this does happen).  Maybe the bill doesn’t get paid because of cash flow, or worse the company goes out of business.  Who does American Express go after?  You… The Risk is all on the professional individual contributor (line leads in manufacturing environments tend not to be required to get American Express Cards).  

It’s not just liability for credit cards.  We still live in an era where even if you BYOD  there are still payments and contracts associated with that tablet, PC, or Smart Phone, at least if you want a phone number or a data plan that isn’t prepaid.    

It’s not to say that the Great Risk Shift doesn’t affect the workforce at every level.  Automotive repair folks have to foot the bill for their own tools so that auto repair shops don’t lose tons of investment in tools as they walk out the door.  Most fast food restaurants require the employees to buy their own uniforms so in the highly likely event of  turnover an expense is shifted away from the employers.  The list is endless.  

Yes, there are arguments to be made for the benefits of the Risk Shift for the professional.  You may be able to pick the type of car you want.  You may be able to chose what cell phone you want.  You may be able to use the corporate card to help with personal cashflow.  But these benefits don’t outweigh the real challenge for the professional in the Great Risk Shift.  The real challenge is that the things we are on the hook for (secure and sufficient retirement, work vehicles, large expense accounts) are all expenses that include large and long term liability attached to the professional, not the company.    

Here is a little tip, no matter what you are required to get or do,  if it’s got a contract and payments associated with it, then it’s a generally a bad deal.  Avoid it if you can.  If not, make sure are prepared for when the bill is unpaid, the company changes the reimbursement policy on autos, or the 401K match is reduced.  These types of things eventually happen to every professional who is in the workforce for any length of time.   The good news is that there is zero Risk in following this advice.