In 1933, a Cambridge, MA electronics company faced the challenges of a deepening economic depression. Over an 18-year history, it had recruited a formidable engineering staff, mostly out of MIT, as well as a corps of highly skilled instrument assemblers. It had built an enviable reputation as the world leader in the technology of radio (the word “electronics” was just coming into vogue in 1933), and its name – General Radio Company – symbolized the breadth and depth of its ambitions.
But now, with sales dropping, General Radio faced a dilemma familiar to companies from that day to this: How do you preserve the treasure of the company – the talent you have marshaled over the years - when the money is running out? Some day that talent will be valuable again, if you can somehow keep the ship afloat during the gathering storm. But how?
The founder and President, a young Oregonian named Melville Eastham, huddled with his Treasurer, Henry Shaw, and the two dreamed up an innovative compensation scheme, unlike any other seen in the United States. If they were forced to slash expenses, say 20 percent, they would not react in the traditional way, cutting the work force by 20 percent. Instead, they would cut the work week by 20 percent. The 40-hour week would become a 32-hour week, trimming the payroll accordingly.
There was one hitch: While the loss of factory hours could easily be justified (if booms required overtime, why not undertime during busts?), the engineering hours were needed now more than ever, for the Company desperately needed the new products that would revive sales. So Eastham and Shaw devised a scheme for professionals they called “the K Plan.”
Here’s how it worked: Engineers and other professionals would have their monthly pay pegged to a “K” factor, which would rise and fall with the tide of business. If business (sales and bookings) were half of plan in a given month, K would be 0.5, and monthly salaries would be halved. And indeed, K started out at 0.5 in 1933. That was the downside (K would have a floor of 0.5). But if and when business recovered, K could rise, to a ceiling of 1.5. (Any surplus would be stored against future shortfalls.) Professionals were invited, not forced, to participate in the K Plan. To make it more attractive, the K factor was rigged to deliver a K of 1.1 when business met quota.
As a result of General Radio’s ingenious K Plan, the Company sailed through the Depression without laying off a single employee. In fact, when a local bank failed, the Company made employee-depositors whole. With the K Plan playing a decisive role, the Company didn’t simply survive the Depression; its fortunes took off later in the 1930s and flourished for decades after that. The K Plan remained in place for 36 years, serving as a cost control in the bad times and a strong motivator in the good times. The good times vastly outnumbered the bad, and the K factor remained well above unity throughout the 1940s, 1950s, and 1960s.
The kind of innovative thinking that produced the K Plan has been sorely lacking lately, and most companies now react to business slumps with knee-jerk layoffs – for some reason often carried out just before Christmas. Companies show little loyalty to their employees, who show just as little loyalty to their companies. It is a world Melville Eastham and Henry Shaw wouldn’t understand and wouldn’t like. The K Plan mightn’t work today; indeed, it was scrapped by a struggling General Radio in 1979. But it did enable one company to make it through the Great Depression with its workforce, its reputation, and its financial integrity intact. There’s a lesson there somewhere, if anyone is listening.
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Anyone interested in learning more about this Company should go to www.lulu.com and search for The General Radio Story.
