Is Loyalty Good for Business?

Would you like your employees to be loyal to you? Are you loyal to your employees? Is loyalty a good thing? Should we foster loyalty in our business, particularly between the employer and the employee?

What is loyalty? Be forewarned: our treatment of this subject is likely to raise some eyebrows.

To understand loyalty, we must ask how loyal behavior is distinguished from just rational behavior. What would be an example of a loyal behavior by an employee (towards an employer) that would be distinct from the behavior of a rational employee operating in their best interest? Similarly, what would be an example of a loyal behavior by an employer (towards an employee) that would be distinct from the behavior of a rational employer acting in the best interest of the company?

For example, an employer might decide to hold on to their employees with make-do work during otherwise slow periods of business, not because it is easier to hold on to those employees for when the business picks up, but rather they feel an obligation to those employees. Likewise, an employee might forego personal time or financial payouts to help out the employer during some difficult periods. In both cases the implicit assumption is that such loyal behavior pays off in the future.

With that backdrop, we offer a definition of loyalty: Loyalty is the practice of maintaining unrecorded items on the balance sheet of personal relationships.

By that definition, when an employee cancels their weekend plans to pitch in to meet a last minute deadline at the plant, the plant manager profusely thanks the employee at the end of that weekend and, in effect, says to the employee, "I owe you one." Did the plant manager record on their balance sheet a liability - I owe this employee one? No, it was an unrecorded off-balance-sheet liability that the company holds. Likewise, the employee feels reasonably reassured that the company will note their extraordinary contribution and do something in return for the employee on a future date. Again, the employee holds an unrecorded off-balance-sheet asset.

The fundamental principle of the school of loyalty is that these unrecorded off-balance-sheet assets and liabilities will eventually reconcile.

That, on a future date, there will occur another event with an offsetting asset/liability the other way. Even though these offsetting events do not cancel each other dollar for dollar, one for one, over time they will cancel on a cumulative basis and both parties will eventually net something close to zero.

That is the principle of the school of loyalty.

Loyalty is a great tool for small companies, for start-ups, for family companies.

Because it allows for cash flow without the use of cash. Loyalty allows the employer to conduct activities that might have otherwise consumed cash, without using cash - by having employees do extraordinary things for them by issuing IOU's. Likewise, the employee gets piece of mind and a sense of security knowing that they have been loyal to the employer. That is why small companies, start-ups and family companies often have a loyalty-based culture.

So, when does loyalty break down?

When the company grows and new people join the company that doesn't have the company history. Actions by the company that might be reasonable and sensible in the context of past events, devoid of history they might seem irrational and appear as shades of favoritism. When the company grows and history is lost, loyalty is likely to be mis-interpreted. Loyalty does not scale with size.

Worse, loyalty does not weather time well, either!

With time, the unrecorded assets and liabilities begin to take a life of their own, wherein each of the asset holder and the liability holder constantly re-evaluate their holding, in their favor! Pretty soon what started out as a balanced sheet of IOU's fail to be balanced any more. Loyalty neither scales with size nor weathers time. As the company grows you have to move on to something beyond loyalty. It is fantastic while it lasts, but don't get too attached to it if you want to grow. One day you will have to settle up and move on.

Food for Thought is our way of sharing interesting concepts on corporate leadership and management with others who might find it useful. The thoughts offered are intended to be controversial and thought provoking. They are intended to help our readers intentionally realize their potential, what we call Potentionality.