Pitfalls of a Paternalistic Management Style

March 5, 2010

Paternalism  “A policy or practice of treating or governing people in a fatherly way, esp. by providing for their needs without giving them rights or responsibility.”

While paternalism has all but vanished from larger companies and diminished in mid-sized ones during the last decade, it still exists in too many organizations with fewer than 100 employees [and some with as many as 200 employees].

There are many pitfalls in being paternalistic, the worst of which is the lack of consistency which ultimately comes from using such a style or of a manager being paternalistic. Other problems which occur are over-staffing, over-compensating, allowance for “empire building”, and allowing poor performance to be the norm.

Paternalism is often easiest to see in smaller companies, and usually in those just starting out. The OWNER/MANAGER in their misguided way believes that they must actually over-compensate in order to attract the most qualified people. Then, in order to retain them, they also must provide every benefit the company can (or cannot) afford.

Paternalism is also a favorite tactic of the totalitarian owner/manager.  They destroy the potential of their company and demoralize their good employees by treating them like children and allowing them to make only very minor decisions on their own.  This “tactic” feeds the ego of the owner/manager but creates a company that will never reach it’s full potential.

 Paternalistic managers/owners are most noted for making promises to keep people “happy”.  A paternalistic owner/manager tells the staff that, “One of these days, we’re going to have a retirement plan, and all incumbent employees will be vested from date of hire.” If the company doesn’t make a profit and no plan is instituted then people are disappointed and “de-motivated” … the opposite of what the owner/manage tried to do.

 What if the owner/manager says, “You will be given a bonus at year-end” and no obligation on the part of the employee or employees – other than continued employment – is implied or expressed, then there is a promise and a contract does exist. The payment of that bonus is costly. To prove that a contract does not exist is costly. Either way, this style of management usually and ultimately produces more costs than profits.

Do any of these sound familiar?

 The OWNER/MANAGER finds his Secretary as indispensable. He gives the secretary promotions, salary increases, and bonuses rather indiscriminately. Another executive’s secretary, who happens to be a minority employee, is not paid at a comparable rate. Discrimination. Over-compensation.

In order to keep staff “happy”, there is an across-the-board Christmas bonus. Some of the employees have not been performing up to (unwritten and sometimes unknown) standards. Poor performers at a particular level or with particular lengths of service are given as much, proportionately, as those who are excellent performers. Lousy management.  TIP: Never, never, never … give a bonus … only give incentives that are EARNED!!

One manager rates his employees as “outstanding” on a regular basis. Without any investigation as to why these outstanding performers haven’t contributed to the company’s profits, the “fair-haired” manager’s employees are given merit increases which may not be based on merit, which are inconsistent with known productivity and performance, and which puts the entire wage and salary system out of kilter. In addition, such inconsistency leads to dissension and other employees complain. Taken to an extreme, one could again have discrimination.

The costs of paternalism can be staggering in relationship to the income and size of the organization.

Rather than freezing wages for those who have been overrated, the correction is usually to raise salaries and grades to match. If the discrepancy is 7.5%, this will mean a huge additional operating expense even for a smaller company. Further, by giving such increases, even though we call them adjustments most employees think of them based on merit.

Performance ratings by a paternalistic owner/manager are selectively higher than what they should be. Because of that, salary increases may be higher than what written policy [when it rarely exists] calls for.

Paternalistic owners/managers usually avoid negative situations, including that of rating the poor performer. Aside from the disparity (unintentional discrimination, but intent has nothing to do with winning or losing a claim) in the resulting aftermath, not only are wages too high, and other employees upset about disparate treatment, but in order to have a company or individual department be productive, one must hire three poor performers to do the work of one excellent one. This has a snowballing effect which ultimately often leads to layoffs.  When the company must decide who to lay off, and based upon all these “outstanding” performance evaluations (and not one negative one on file), this is a difficult choice.

Perhaps the saddest words to hear from the paternalistic OWNER/MANAGER is, “After all I’ve done for them, and this is the thanks I get!”

Appreciation is a fleeting emotion and most employees still ask, “What have you done for me lately?” Paternalism is a no-win style of management. Not once will anyone hear an employee say that they are under worked and underpaid.

So, what does all this mean?

Paternalism leads to:

  •  unequal treatment of employees;
  • increased costs of running an operation;
  • a good possibility that monetary losses will be sustained;
  • incongruent and inconsistent performance appraisals will be given [if at all];
  • and perhaps even a retreat from the realities of the real world of business.

Strategic Partnership: How to Ensure Your Mutual Growth is Synergistic

February 10, 2010


Many companies reach a point where their growth has reached a plateau. Finding new markets or procedures to get past this plateau can be difficult. One option may be to pursue a strategic partnership. If handled properly, a strategic partnership can help a company grow in new directions.

For companies, looking to develop a new markets, bringing in a strategic partner may offer a good solution. But keep in mind that a strategic partnership is a lot like marriage. To make it work, you have to go into it with your eyes wide open and have a long-term strategy for prosperity in view.

Preparing for the Partnership

A strategic partner can give much more than money to your company’s success. Such an alliance might also give manufacturing or technological know-how, marketing agreements that give you access to new products or distribution channels, or contacts with key players.

On the downside, if you are a small firm, consider whether your entrepreneurial style will mesh with a larger firm that may have a slower, multilayered decision-making process. Or, if you are a larger firm, will you be able to integrate a company with a more informal management style? These issues are important to consider because the employees, customers  and suppliers of both partners will be watching. The greatest success of other partnerships will hinge on their cooperation. The compability of the new partners will often decide the degree of employee, customer and supplier support.

Creating  a Win-Win Situation

Before a deal proceeds, you and the potential strategic partner must answer several questions:

  • Is there something in the deal for everyone?
  • If an investment is required, will the deal be financed primarily with debt or equity? With debt, the new partner may settle for a lower return than that required by investors concerned with recouping large equity investments.
  • How do participants’ needs fit the business goals of the deal?
  • How will existing management take part in the reorganized company? Will you keep the management team from only one company, or will you create a new management team with members from both groups?
  • Does the partner want more leverage or control than you consider prudent?
  • What is the rate of return requirement, and how is it achieved?
  • Are the potential new partners knowledgeable about the industry?
  • How long has the potential investor kept other investments or stayed involved in other partnerships? Some expect to sell their shares quickly?

Making the Right Decision?

While pursuing a strategic partnership may provide a good way for your company to grow, judging the various aspects of a strategic partnership isn’t easy. You have to live with the partner you choose. Therefore, finding potential partners whose skills, goals and reputations complement your own is crucial for success. Take your time, and make the “courtship” a test of your future relationship.

Please feel free to share your experiences here with strategic partnerships that worked well or not so well.