Chapter 16 Strategic Human Resource Management

HR as a Strategic Partner

Strategic human resource management (SHRM)An organizational level approach to human resources management with a concern for the effects of HRM practices on firm performance. is not just a function of the HR department—all managers and executives need to be involved because the role of people is so vital to a company’s competitive advantage.Becker, B. E., & Huselid, M. A. (2006). Strategic human resources management: Where do we go from here? Journal of Management, 32(6): 898–925. In addition, organizations that value their employees are more profitable than those that do not.Huselid, M. A. (1995). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal, 38, 635–672; Pfeffer, J. (1998). The human equation: Building profits by putting people first. Boston: Harvard Business School Press; Pfeffer, J., & Veiga, J. F. (1999). Putting people first for organizational success. Academy of Management Executive, 13, 37–48; Welbourne, T., & Andrews, A. (1996). Predicting performance of initial public offering firms: Should HRM be in the equation? Academy of Management Journal, 39, 910–911. Research shows that successful organizations have several things in common, such as providing employment security, engaging in selective hiring, using self-managed teams, being decentralized, paying well, training employees, reducing status differences, and sharing information.Pfeffer, J., & Veiga, J. F. 1999. Putting people first for organizational success. Academy of Management Executive, 13, 37–48. When organizations enable, develop, and motivate human capital, they improve accounting profits as well as shareholder value in the process.Brian E., Becker, B. E., Huselid, M. A., & Ulrich, D. (2002). Six key principles for measuring human capital performance in your organization. University of Maryland Working Paper. The most successful organizations manage HR as a strategic asset and measure HR performance in terms of its strategic impact.

Here are some questions that HR should be prepared to answer in this new world.Ulrich, D. (1998). Delivering results. Boston: Harvard Business School Press.

• Competence: To what extent does our company have the required knowledge, skills, and abilities to implement its strategy?
• Consequence: To what extent does our company have the right measures, rewards, and incentives in place to align people’s efforts with the company strategy?
• Governance: To what extent does our company have the right structures, communications systems and policies to create a high-performing organization?
• Learning and Leadership: To what extent can our company respond to uncertainty and learn and adapt to change quickly?

The Importance of Human Capital

Employees provide an organization’s human capitalThe collective sum of the attributes, life experience, knowledge, inventiveness, energy, and enthusiasm that its people choose to invest in their work.. Your human capital is the set of skills that you have acquired on the job, through training and experience, and which increase your value in the marketplace. The Society of Human Resource Management’s Research Quarterly defined an organization’s human capital as follows: “A company’s human capital asset is the collective sum of the attributes, life experience, knowledge, inventiveness, energy and enthusiasm that its people choose to invest in their work.”Weatherly, L. (2003, March). Human capital—the elusive asset; measuring and managing human capital: A strategic imperative for HR. Research Quarterly, Society for Human Resource Management. Retrieved June 1, 2003, from http://www.shrm.org/research/quarterly/0301capital.pdf.

Focus on Outcomes

Unfortunately, many HR managers are more effective in the technical or operational aspects of HR than they are in the strategic, even though the strategic aspects have a much larger effect on the company’s success.Huselid, M. A., Jackson, S. E., & Schuler, R. S. (1997). Technical and strategic human resource management effectiveness as determinants of firm performance. Academy of Management Journal, 40(1), 171–188. In the past, HR professionals focused on compliance to rules, such as those set by the federal government, and they tracked simple metrics like the number of employees hired or the number of hours of training delivered. The new principles of management, however, require a focus on outcomes and results, not just numbers and compliance. Just as lawyers count how many cases they’ve won—not just how many words they used—so, too must HR professionals track how employees are using the skills they’ve learned to attain goals, not just how many hours they’ve spent in training.Ulrich, D. (1998.) Delivering results. Boston: Harvard Business School Press.

John Murabito, executive vice president and head of HR and Services at Cigna, says that HR executives need to understand the company’s goals and strategy and then provide employees with the skills needed. Too often, HR execs get wrapped up in their own initiatives without understanding how their role contributes to the business. That is dangerous, because when it comes to the HR department, “anything that is administrative or transactional is going to get outsourced,” Murabito says. Marquez, J. (2007, September 10). On the front line: A quintet of 2006’s highest-paid HR leaders discuss how they are confronting myriad talent management challenges as well as obstacles to being viewed by their organizations as strategic business partners. Workforce Management, 86(5), 22. Indeed, the number of HR outsourcing contracts over $25 million has been increasing, with 2,708 active contracts under way in 2007.TPI Counts 2700+ Outsourcing Contracts. (2007, December). Retrieved January 30, 2009, from http://www.sharedxpertise.org/file/230/trends--research.html. For example, the Bank of America outsourced its HR administration to Arinso. Arinso will provide timekeeping, payroll processing, and payroll services for 10,000 Bank of America employees outside the U.S.HRO Europe, August 23, 2006. Retrieved January 30, 2009, from http://www.hroeurope.com. To avoid outsourcing, HR needs to stay relevant and accept accountability for its business results. In short, the people strategy needs to be fully aligned with the company’s business strategy and keep the focus on outcomes.

Key Elements of HR

Beyond the basic need for compliance with HR rules and regulations, the four key elements of HR are summarized in the following figure. In high-performing companies, each element of the HR system is designed to reflect best practice and to maximize employee performance. The different parts of the HR system are strongly aligned with company goals.

Figure 16.5 Key HR Elements

What Talent Management Means

Peter Cappelli of the Wharton SchoolCappelli, P. (2008, March). Talent management for the 21st century, Boston. Harvard Business Review, 17–36. defines talent managementAnticipating the need for human capital and setting a plan to meet it. as anticipating the need for human capital and setting a plan to meet it. It goes hand in hand with succession planningA process whereby an organization ensures that employees are recruited and developed to fill each key role within the company., the process whereby an organization ensures that employees are recruited and developed to fill each key role within the company. Most companies, unfortunately, do not plan ahead for the talent they need, which means that they face shortages of critical skills at some times and surpluses at other times. Other companies use outdated methods of succession planning that don’t accurately forecast the skills they’ll need in the future.

Interestingly, however, techniques that were developed to achieve productivity breakthroughs in manufacturing can be applied to talent management. For example, it is expensive to develop all talent internally; training people takes a long time and requires accurate predictions about which skill will be needed. Such predictions are increasingly difficult to make in our uncertain world. Therefore, rather than developing everyone internally, companies can hire from the outside when they need to tap specific skills. In manufacturing, this principle is known as “make or buy.” In HR, the solution is to make and buy; that is, to train some people and to hire others from the external marketplace. In this case, “making” an employee means hiring a person who doesn’t yet have all the needed skills to fulfill the role, but who can be trained (“made”) to develop them. The key to a successful “make” decision is to distinguish between the high-potential employees who don’t yet have the skills but who can learn them from the mediocre employees who merely lack the skills. The “buy” decision means hiring an employee who has all the necessary skills and experience to fulfill the role from day one. The “buy” decision is useful when it’s too difficult to predict exactly which skills will be needed in the future.Buhler, Patricia M. (2008, March). Managing in the new millennium; succession planning: Not just for the c suite. Supervision, 69(3), 19-23.

Another principle from manufacturing that works well in talent management is to run smaller batch sizes. That is, rather than sending employees to 3-year-long training programs, send them to shorter programs more frequently. With this approach, managers don’t have to make the training decision so far in advance. They can wait to decide exactly which skills employees will learn closer to the time the skill is needed, thus ensuring that employees are trained on the skills they’ll actually use.

Attracting the Right Workers to the Organization

Winning the war for talent means more than simply attracting workers to your company. It means attracting the right workers—the ones who will be enthusiastic about their work. Enthusiasm for the job requires more than having a good attitude about receiving good pay and benefits—it means that an employee’s goals and aspirations also match those of the company. Therefore, it’s important to identify employees’ preferences and mutually assess how well they align with the company’s strategy. To do this, the organization must first be clear about the type of employee it wants. Companies already do this with customers: marketing executives identify specific segments of the universe of buyers to target for selling products. Red Bull, for example, targets college-age consumers, whereas SlimFast goes for adults of all ages who are overweight. Both companies are selling beverages but to completely different consumer segments. Similarly, companies need to develop a profile of the type of workers they want to attract. Do you want entrepreneurial types who seek autonomy and continual learning, or do you want team players who enjoy collaboration, stability, and structure? Neither employee type is inherently “better” than another, but an employee who craves autonomy may feel constrained within the very same structure in which a team player would thrive.

Earlier, we said that it was important to “mutually assess” how well employees’ preferences aligned with the company’s strategy. One-half of “mutual” refers to the company, but the other half refers to the job candidates. They also need to know whether they’ll fit well into the company. One way to help prospective hires make this determination is to describe to them the “signature experience” that sets your company apart. As Tamara Erickson and Lynda Gratton define it, your company’s signature experience is the distinctive practice that shows what it’s really like to work at your company.Erickson, T., & Gratton, L. (2007, March). What it means to work here. Harvard Business Review, 23–29.

For example, here are the signature experiences of two companies, Whole Foods and Goldman Sachs: At Whole Foods, team-based hiring is a signature experience—employees in each department vote on whether a new employee will be retained after a 4-week trial period. This demonstrates to potential hires that Whole Foods is all about collaboration. In contrast, Goldman Sachs’s signature experience is multiple one-on-one interviews. The story often told to prospective hires is of the MBA student who went through 60 interviews before being hired. This story signals to new hires that they need to be comfortable meeting endless new people and building networks across the company. Those who enjoy meeting and being interviewed by so many diverse people are exactly the ones who will fit into Goldman’s culture.

The added benefit of hiring workers who match your organizational culture and are engaged in their work is that they will be less likely to leave your company just to get a higher salary.

Keeping Star Employees

The war for talent stems from the approaching shortage of workers. As we mentioned earlier in this chapter, the millions of baby boomers reaching retirement age are leaving a gaping hole in the U.S. workforce. What’s more, workers are job-hopping more frequently than in the past. According to the U.S. Bureau of Labor Statistics, the average job tenure has dropped from 15 years in 1980 to 4 years in 2007. As a manager, therefore, you need to give your employees reasons to stay with your company. One way to do that is to spend time talking with employees about their career goals. Listen to their likes and dislikes so that you can help them use the skills they like using or develop new ones they wish to acquire.Kaye, B. (2008). Love ’em or lose ’em. San Francisco: Barrett-Koehler.

Don’t be afraid to “grow” your employees. Some managers want to keep their employees in their department. They fear that helping employees grow on the job will mean that employees will outgrow their job and leave it.Field, A. (2008, June). Do your stars see a reason to stay? Harvard Management Update,. But, keeping your employees down is a sure way to lose them. What’s more, if you help your employees advance, it’ll be easier for you to move up because your employees will be better able to take on the role you leave behind.

In some cases, your employees may not be sure what career path they want. As a manager, you can help them identify their goals by asking questions such as:

• What assignments have you found most engaging?
• Which of your accomplishments in the last six months made you proudest?
• What makes for a great day at work?Butler, T. (2007). Getting unstuck. Boston: Harvard Business School Press.

Benefits of Good Talent Management

Global consulting firm McKinsey & Company conducted a study to identify a possible link between a company’s financial performance and its success in managing talent. The survey results, reported in May 2008, show that there was indeed a relationship between a firm’s financial performance and its global talent management practices. Three talent management practices in particular correlated highly with exceptional financial performance:

• Creating globally consistent talent evaluation processes.
• Achieving cultural diversity in a global setting.
• Developing and managing global leaders.McKinsey global-talent-management survey of over 450 executives. (2007, December). Retrieved January 30, 2009, from http://www.mckinseyquarterly.com/article_print.aspx?L2=18&L3=31&ar=2140.

The McKinsey survey found that companies achieving scores in the top third in any of these three areas had a 70% chance of achieving financial performance in the top third of all companies.Guthridge, M., & Komm, A. B. (1988, May). Why multinationals struggle to manage talent. McKinsey Quarterly, 19–25.

Let’s take a closer look at what each of these three best practices entail. First, having consistent talent evaluation means that employees around the world are evaluated on the same standards. This is important because it means that if an employee from one country transfers to another, his or her manager can be assured that the employee has been held to the same level of skills and standards. Second, having cultural diversity means having employees who learn something about the culture of different countries, not just acquire language skills. This helps bring about open-mindedness across cultures. Finally, developing global leaders means rotating employees across different cultures and giving them international experience. Companies who do this best also have policies of giving managers incentives to share their employees with other units.

Job-Description Best Practices

Walt has a problem. He works as a manager in a medium-sized company and considers himself fortunate that the organizational chart allows him a full-time administrative assistant (AA). However, in the two years Walt has been in his job, five people have held this AA job. The most recent AA, who resigned after four weeks, told Walt that she had not known what the job would involve. “I don’t do numbers, I’m not an accountant,” she said. “If you want someone to add up figures and do calculations all day, you should say so in the job description. Besides, I didn’t realize how long and stressful my commute would be—the traffic between here and my house is murder!”

Taken aback, Walt contacted the company’s HR department to clarify the job description for the AA position. What he learned was that the description made available to applicants was, indeed, inadequate in a number of ways. Chances are that frequent turnover in this AA position is draining Walt’s company of resources that could be used for much more constructive purposes.

An accurate and complete job description is a powerful SHRM tool that costs little to produce and can save a bundle in reduced turnover. While the realistic description may discourage some applicants (for example, those who lack an affinity for calculations might not bother to apply for Walt’s AA position), those who follow through with the application process are much more likely to be satisfied with the job once hired. In addition to summarizing what the worker will actually be doing all day, here are some additional suggestions for writing an effective job description:

• List the job requirements in bullet form so that job seekers can scan the posting quickly.
• Use common industry terms, which speak to knowledgeable job seekers.
• Avoid organization-specific terms and acronyms, which would confuse job seekers.
• Use meaningful job titles (not the internal job codes of the organization).
• Use key words taken from the list of common search terms (to maximize the chance that a job posting appears on a job seeker’s search).
• Include information about the organization, such as a short summary and links to more detailed information.
• Highlight special intangibles and unusual benefits of the job and workplace (e.g., flextime, travel, etc.).
• Specify the job’s location (and nearest large city) and provide links to local community pages (to entice job seekers with quality-of-life information).

Tailoring Recruitment to Match Company Culture

Managers who hire well don’t just hire for skills or academic background; they ask about the potential employee’s philosophy on life or how the candidate likes to spend free time. These questions help the manager assess whether the cultural fit is right. A company in which all work is done in teams needs team players, not just “A” students. Ask questions like, “Do you have a personal mission statement? If not, what would it be if you wrote one today?”Pfeffer, J. (1998). The human equation. Boston: Harvard Business School Press. to identify potential hires’ preferences.

At Google, for example, job candidates are asked questions like, “If you could change the world using Google’s resources, what would you build?”Slater, C. (2008, March). The faces and voices of Google. Fast Company, 37–45. Google wants employees who will think and act on a grand scale, employees who will take on the challenges of their jobs, whatever their job may be. Take Josef DeSimone, who’s Google’s executive chef. DeSimone, who’s worked everywhere from family-style restaurants to Michelin-caliber ones, was amazed to learn that Google had 17 cafes for its employees. “Nobody changes the menu daily on this scale,” he says. “It’s unheard of.” When he was hired, DeSimone realized, “Wow, you hire a guy who’s an expert in food and let him run with it! You don’t get in his way or micromanage.”Slater, C. (2008, March). Josef DeSimone—executive chef. Fast Company, 46–48. Google applies this approach to all positions and lets employees run with the challenge.

Traditionally, companies have built a competitive advantage by focusing on what they have—structural advantages such as economies of scale, a well-established brand, or dominance in certain market segments. Companies such as Southwest Airlines, by contrast, see its people as their advantage: “Our fares can be matched; our airplanes and routes can be copied. But we pride ourselves on our customer service,” said Sherry Phelps, director of corporate employment. That’s why Southwest looks for candidates who generate enthusiasm and leans toward extraverted personalities.Bruce, A. (1997, March). Southwest: Back to the FUNdamentals. HR Focus, 74(3), 11; Freiberg, K., & Freiberg, J. (2003). Nuts! Southwest Airlines’s crazy recipe for business and personal success. Austin, TX: Bard; Hallowell, R. (1996, Winter). Southwest Airlines: A case study linking employee needs satisfaction and organizational capabilities to competitive advantage. Human Resource Management, 35(4), 513–529; Heskett J. L., & Hallowell, R. (1993). Southwest Airlines—1993 (A). Harvard Business School Case; Southwest Airlines’ Herb Kelleher: Unorthodoxy at work. (1995, January). Management Review, 2–9; LaBarre, P. (1996, February 5). Lighten up! Blurring the line between fun and work not only humanizes organizations but strengthens the bottom line. Industry Week, 245(3), 53–67; Labich, K. (1994, May 2). Is Herb Kelleher America’s best CEO? Fortune, 44–45; and McNerney, D. J. (1996 August). Employee motivation: creating a motivated workforce. HR Focus, 73(8), 1; Tomkins, R. (1996, November 11). HR: The seriously funny airline. Financial Times (33137), 14, A1–A5. Southwest hires for attitude. Flight attendants have been known to sing the safety instructions, and pilots tell jokes over the public address system.

Southwest Airlines makes clear right from the start the kind of people it wants to hire. For example, recruitment ads showed Southwest founder Herb Kelleher dressed as Elvis and read: “Work in a Place Where Elvis Has Been Spotted…The qualifications? It helps to be outgoing. Maybe even a bit off-center. And be prepared to stay awhile. After all, we have the lowest employee turnover rate in the industry.” People may scoff or question why Southwest indulges in such showy activities or wonder how an airline can treat its jobs so lightly. Phelps answers, “We do take our work seriously. It’s ourselves that we don’t.” People who don’t have a humane, can-do attitude are fired. Southwest has a probationary period during which it determines the compatibility of new hires with the culture. People may be excellent performers, but if they don’t match the culture, they are let go. As Southwest’s founder Kelleher once said, “People will write me and complain, ‘Hey, I got terminated or put on probation for purely subjective reasons.’ And I’ll say, ‘Right! Those are the important reasons.’”

In many states, employees are covered under what is known as the at-will employment doctrineA doctrine of American law that defines an employment relationship in which either party can break the relationship with no liability, provided there was no express contract for a definite term governing the employment relationship and that the employer does not belong to a collective bargaining unit (i.e., a union).. At-will employment is a doctrine of American law that defines an employment relationship in which either party can break the relationship with no liability, provided there was no express contract for a definite term governing the employment relationship and that the employer does not belong to a collective bargaining unit (i.e., a union).Rothstein, M. A., Knapp, Andria S., & Liebman, Lance. (1987). Cases and materials on employment law (p. 738). New York: Foundation Press. However, there are legal restrictions on how purely subjective the reasons for firing can be. For instance, if the organization has written hiring and firing procedures and does not follow them in selective cases, then those cases might give rise to claims of wrongful termination. Similarly, in situations where termination is clearly systematic, for example, based on age, race, religion, and so on, wrongful termination can be claimed.

Tools and Methods: Interviewing and Testing

To make good selection and placement decisions, you need information about the job candidate. Two time-tested methods to get that information are testing and interviewing.

A detailed interview begins by asking the candidate to describe his work history and then getting as much background on his most recent position (or the position most similar the open position). Ask about the candidate’s responsibilities and major accomplishments. Then, ask in-depth questions about specific job situations. Called situational interviewsA job interview where candidates are asked in-depth questions about specific job situations in the past or future., these types of interviews can focus on past experience or future situations. For example, experienced-based questions are “Tell me about a major initiative you developed and the steps you used to get it adopted.” Or, “Describe a problem you had with someone and how you handled it.” In contrast, future-oriented situation interview questions ask candidates to describe how they would handle a future hypothetical situation, such as: “Suppose you came up with a faster way to do a task, but your team was reluctant to make the change. What would you do in that situation?”

In addition to what is asked, it is also important that interviewers understand what they should not ask, largely because certain questions lead to answers that may be used to discriminate. There are five particularly sensitive areas. First, the only times you can ask about age are when it is a requirement of a job duty or you need to determine whether a work permit is required. Second, it is rarely appropriate or legal to ask questions regarding race, color, national origin, or gender. Third, although candidates may volunteer religious or sexually-orientated information in an interview, you still need to be careful not to discriminate. Ask questions that are relevant to work experience or qualifications. Fourth, firms cannot discriminate for health or disabilities; you may not ask about smoking, health-related questions, or disabilities in an interview. Finally, you may not ask questions about marital status, children, personal life, pregnancy, or arrest record. These kinds of questions could be tempting to ask if you are interviewing for a position requiring travel; however, you can only explain the travel requirements and confirm that the requirements are acceptable.

In addition to interviews, many employers use testing to select and place job applicants. Any tests given to candidates must be job related and follow guidelines set forth by the Equal Opportunity Employment Commission to be legal. For the tests to be effective, they should be developed by reputable psychologists and administered by professionally qualified personnel who have had training in occupations testing in an industrial setting. The rationale behind testing is to give the employer more information before making the selection and placement decision—information vital to assessing how well a candidate is suited to a particular job. Most preemployment assessment tests measure thinking styles, behavioral traits, and occupational interests. The results are available almost immediately after a candidate completes the roughly hour-long questionnaire. Thinking styles tests can tell the potential employer how fast someone can learn new things or how well he or she can verbally communicate. Behavioral traits assessments measure energy level, assertiveness, sociability, manageability, and attitude. For example, a high sociability score would be a desirable trait for salespeople.Mrosko, T. (2006, August). The personnel puzzle: Preemployment testing can help your bottom line. Inside Business, 8(8), 60–73.

International Staffing and Placement

In our increasingly global economy, managers need to decide between using expatriates or hiring locals when staffing international locations. On the surface, this seems a simple choice between the firm-specific expertise of the expatriate and the cultural knowledge of the local hire. In reality, companies often fail to consider the high probability and high cost of expatriates failing to adapt and perform in their international assignments.

Figure 16.7

Living and working in another place, such as São Paulo, Brazil, can be exciting, rewarding, and challenging.

© 2010 Jupiterimages Corporation

For example, cultural issues can easily create misunderstandings between expatriate managers and employees, suppliers, customers, and local government officials. At an estimated cost of $200,000 per failed expatriate, international assignment decisions are often made too lightly in many companies. The challenge is to overcome the natural tendency to hire a well-known, corporate insider over an unknown local at the international site. Here are some indications to use to determine whether an expatriate or a local hire would be best.

Managers may want to choose an expatriate when:

• Company-specific technology or knowledge is important.
• Confidentiality in the staff position is an issue.
• There is a need for speed (assigning an expatriate is usually faster than hiring a local).
• Work rules regarding local workers are restrictive.
• The corporate strategy is focused on global integration/

Managers may want to staff the position with a local hire when:

• The need to interact with local customers, suppliers, employees, or officials is paramount.
• The corporate strategy is focused on multidomestic/market-oriented operations.
• Cost is an issue (expatriates often bring high relocation/travel costs).
• Immigration rules regarding foreign workers are restrictive.
• There are large cultural distances between the host country and candidate expatriates.Weems, Rebecca E. (1998). Ethnocentric staffing and international assignments: a transaction cost theory approach. Presentation at the Academy of Management Conference, August 9–12.

Pay System Elements

As summarized in the following table, pay can take the form of direct or indirect compensation. Nonmonetary pay can include any benefit an employee receives from an employer or job that does not involve tangible value. This includes career and social rewards, such as job security, flexible hours and opportunity for growth, praise and recognition, task enjoyment, and friendships. Direct pay is an employee’s base wage. It can be an annual salary, hourly wage, or any performance-based pay that an employee receives, such as profit-sharing bonuses.

Indirect compensation is far more varied, including everything from legally required public protection programs such as social security to health insurance, retirement programs, paid leave, child care, or housing. Some indirect compensation elements are required by law: social security, unemployment, and disability payments. Other indirect elements are up to the employer and can offer excellent ways to provide benefits to the employees and the employer as well. For example, a working parent may take a lower-paying job with flexible hours that will allow him or her to be home when the children get home from school. A recent graduate may be looking for stable work and an affordable place to live. Both of these individuals have different needs and, therefore, would appreciate different compensation elements.

Setting Pay Levels

When setting pay levels for positions, managers should make sure that the pay level is fair relative to what other employees in the position are being paid. Part of the pay level is determined by the pay level at other companies. If your company pays substantially less than others, it’s going to be the last choice of employment unless it offers something overwhelmingly positive to offset the low pay, such as flexible hours or a fun, congenial work atmosphere. Besides these external factors, companies conduct a job evaluationAn evaluation of the positions in an organization to understand job design requirements and identify positions critical to strategy and firm performance. to determine the internal value of the job—the more vital the job to the company’s success, the higher the pay level. Jobs are often ranked alphabetically—“A” positions are those on which the company’s value depends, “B” positions are somewhat less important in that they don’t deliver as much upside to the company, and “C” positions are those of least importance—in some cases, these are outsourced.

The most vital jobs to one company’s success may not be the same as in other companies. For example, information technology companies may put top priority on their software developers and programmers, whereas for retailers such as Nordstrom, the “A” positions are those frontline employees who provide personalized service. For an airline, pilots would be a “B” job because, although they need to be well trained, investing further in their training is unlikely to increase the airline’s profits. “C” positions for a retailer might include back office bill processing, while an information technology company might classify customer service as a “C” job.

When setting reward systems, it’s important to pay for what the company actually hopes to achieve. Steve Kerr, vice president of corporate management at General Electric, talks about the common mistakes that companies make with their reward systems, such as saying they value teamwork but only rewarding individual effort. Similarly, companies say they want innovative thinking or risk taking, but they reward people who “make the numbers.”Kerr, S. (1995). On the folly of rewarding for A, while hoping for B. Academy of Management Executive, 9(1), 25–37. If companies truly want to achieve what they hope for, they need payment systems aligned with their goals. For example, if retention of star employees is important to your company, reward managers who retain top talent. At Pepsico, for instance, one-third of a manager’s bonus is tied directly to how well the manager did at developing and retaining employees. Tying compensation to retention makes managers accountable.Field, A. (2008, June). Do your starts see a reason to stay? Harvard Management Update, 5–6.

Figure 16.8

Regardless of country, pay is a critical managerial control.

© 2010 Jupiterimages Corporation

Pay Structures for Groups and Teams

So far, we have discussed pay in terms of individual compensation, but many employers also use compensation systems that reward all of the organization’s employees as a group or various groups and teams within the organization. Let’s examine some of these less traditional pay structures.

Pay Systems That Reward Both Team and Individual Performance

There are two main theories of how to reward employees. Nancy KatzKatz, N. R. (1998). Promoting a healthy balance between individual achievement and team success: The impact of hybrid reward systems. Presented at the Do Rewards Make a Difference? session at the Academy of Management Conference, August 9–12. characterized the theories as two opposing camps. The first camp advocates rewarding individual performance, through plans such as commissions-sales schemes and merit-based-pay. The claim is that this will increase employees’ energy, drive, risk taking, and task identification. The disadvantages of rewarding individual performance are that employees will cooperate less, that high performers may be resented by others in the corporation, and that low performers may try to undermine top performers.

The second camp believes that organizations should reward team performance, without regard for individual accomplishment. This reward system is thought to bring the advantages of increased helping and cooperation, sharing of information and resources, and mutual-respect among employees. The disadvantages of team-based reward schemes are that they create a lack of drive, that low performers are “free riders,” and that high performers may withdraw or become tough cops.

Katz sought to identify reward schemes that achieve the best of both worlds. These hybrid pay systems would reward individual and team performance, promoting excellence at both levels. Katz suggested two possible hybrid reward systems. The first system features a base rate of pay for individual performance that increases when the group reaches a target level of performance. In this reward system, individuals have a clear pay-for-performance incentive, and their rate of pay increases when the group as a whole does well. In the second hybrid, the pay-for-performance rate also increases when a target is reached. Under this reward system, however, every team member must reach a target level of performance before the higher pay rate kicks in. In contrast with the first hybrid, this reward system clearly incentivizes the better performers to aid poorer performers. Only when the poorest performer reaches the target does the higher pay rate kick in.

e-HRM

Figure 16.9

Computers and the Internet are revolutionizing HR practices.

© 2010 Jupiterimages Corporation

At the same time, technology is changing the way HR is done. The electronic human resource management (e-HRM) business solution is based on the idea that information technologies, including the Web, can be designed for human resources professionals and executive managers who need support to manage the workforce, monitor changes, and gather the information needed in decision making. At the same time, e-HRM can enable all employees to participate in the process and keep track of relevant information. For instance, your place of work provides you with a Web site where you can login; get past and current pay information, including tax forms (i.e., 1099, W-2, and so on); manage investments related to your 401(k); or opt for certain medical record-keeping services.

More generally, for example, many administrative tasks are being done online, including:

• providing and describing insurance and other benefit options
• enrolling employees for those benefits
• enrolling employees in training programs
• administering employee surveys to gauge their satisfaction

Many of these tasks are being done by employees themselves, which is referred to as employee self-service. With all the information available online, employees can access it themselves when they need it.

Part of an effective HR strategy is using technology to reduce the manual work performance by HR employees. Simple or repetitive tasks can be performed self-service through e-HRM systems that provide employees with information and let them perform their own updates. Typical HR services that can be formed in an e-HRM system include:

• Answer basic compensation questions.
• Look up employee benefits information.
• Process candidate recruitment expenses.
• Receive and scan resumes into recruiting software.
• Enroll employees in training programs.
• Maintain training catalog.
• Administer tuition reimbursement.
• Update personnel files.

Organizations that have invested in e-HRM systems have found that they free up HR professionals to spend more time on the strategic aspects of their job. These strategic roles include employee development, training, and succession planning.

The Value of High-Performance Work Systems

Employees who are highly involved in conceiving, designing, and implementing workplace processes are more engaged and perform better. For example, a study analyzing 132 U.S. manufacturing firms found that companies using HPWSs had significantly higher labor productivity than their competitors. The key finding was that when employees have the power to make decisions related to their performance, can access information about company costs and revenues, and have the necessary knowledge, training, and development to do their jobs—and are rewarded for their efforts—they are more productive.Konrad, A. M. (2006, March/April). Engaging employees through high-involvement work practices. Ivey Business Journal Online, 1–6. Retrieved January 30, 2009, from http://www.iveybusinessjournal.com.

For example, Mark Youndt and his colleaguesYoundt, M., Snell, S., Dean, J., & Lepak, K. (1996). Human resource management, manufacturing strategy, and firm performance. Academy of Management Journal, 39, 836–866. demonstrated that productivity rates were significantly higher in manufacturing plants where the HRM strategy focused on enhancing human capital. Delery and Doty found a positive relationship between firm financial performance and a system of HRM practices. Delery, J., & Doty, H. (1996). Modes of theorizing in strategic human resource management: Tests of universalistic, contingency, and configurational performance predictions. Academy of Management Journal 39, 802–835. Huselid, Jackson, and Schuler found that increased HRM effectiveness corresponded to an increase in sales per employee, cash flow, and company market value. Huselid, M., Jackson, S., and Schuler, R. (1997). Technical and strategic human resource management effectiveness as determinants of firm performance. Academy of Management Journal 40, 171–188.

HPWS can be used globally to good result. For example, Fey and colleagues studied 101 foreign-based firms operating in Russia and found significant linkages between HRM practices, such as incentive-based compensation, job security, employee training, and decentralized decision making, and subjective measures of firm performance. Fey, C., Bjorkman, I., & Pavlovskaya, A. (2000). The effect of human resource management practices on firm performance in Russia. International Journal of Human Resource Management, 11, 1–18.

Improving Organizational Performance

Organizations that want to improve their performance can use a combination of HR systems to get these improvements. For example, performance measurement systems help underperforming companies improve performance. The utility company Arizona Public Service used a performance measurement system to rebound from dismal financial results. The company developed 17 “critical success indicators,” which it measures regularly and benchmarks against the best companies in each category. Of the 17, nine were identified as “major critical success indicators.” They are:

• cost to produce kilowatt hour
• customer satisfaction
• fossil plants availability
• operations and maintenance expenditures
• construction expenditures
• ranking as corporate citizen in Arizona
• safety all-injury incident rate
• nuclear performance
• shareholder value return on assets

Each department sets measurable goals in line with these indicators, and a gainsharing plan rewards employees for meeting the indicators.

In addition, companies can use reward schemes to improve performance. Better-performing firms tend to invest in more sophisticated HRM practices, which further enhances organizational performance.Shih, H.-A., Chiang, Y.-H., & Hsu, C.-C. (2006, August). Can high performance work systems really lead to better performance? International Journal of Manpower, 27(8), 741–763. Currently, about 20% of firms link employee compensation to the firm’s earnings. They use reward schemes such as employee stock ownership plans, gainsharing, and profit sharing. This trend is increasing.

Researcher Michel Magnan wanted to find out: Is the performance of an organization with a profit-sharing plan better than other firms? And, does adoption of a profit-sharing plan lead to improvement in an organization’s performance?

The reasons profit-sharing plans would improve organizational performance go back to employee motivation theory. A profit-sharing plan will likely encourage employees to monitor one another’s behavior because “loafers” would erode the rewards for everyone. Moreover, profit sharing should lead to greater information sharing, which increases the productivity and flexibility of the firm.

Magnan studied 294 Canadian credit unions in the same region (controlling for regional and sector-specific economic effects). Of the firms studied, 83 had profit sharing plans that paid the bonus in full at the end of the year. This meant that employees felt the effect of the organizational performance reward immediately, so it had a stronger motivational effect than a plan that put profits into a retirement account, where the benefit would be delayed (and essentially hidden) until retirement.

Magnan’s results showed that firms with profit-sharing plans had better performance on most facets of organizational performance. They had better performance on asset growth, market capitalization, operating costs, losses on loans, and return on assets than firms without profit-sharing plans. The improved performance was especially driven by activities where employee involvement had a quick, predictable effect on firm performance, such as giving loans or controlling costs.

Another interesting finding was that when firms adopted a profit-sharing plan, their organizational performance went up. Profit-sharing plans appear to be a good turnaround tool because the firms that showed the greatest improvement were those that had not been performing well before the profit-sharing plan. Even firms that had good performance before adopting a profit-sharing plan had better performance after the profit-sharing plan.Magnan, M., & St-Onge, S. (1998). Profit sharing and firm performance: A comparative and longitudinal analysis. Presented at the Academy of Management Conference, August 9–12.

Applying the Balanced Scorecard Method to HR

Because the Balanced Scorecard focuses on the strategy and metrics of the business, Mark Huselid and his colleagues took the Balanced Scorecard concept a step further and developed the HR and Workforce Scorecard to provide framework specific to HR. According to Huselid, the Workforce ScorecardAn application of the Balanced Scorecard concept to an organization’s human capital to identify and measure the behaviors, skills, mind-sets, and results required for the workforce to contribute to the company’s success. identifies and measures the behaviors, skills, mind-sets, and results required for the workforce to contribute to the company’s success. Specifically, as summarized in the figure, the Workforce Scorecard has four key sequential elements:Huselid, M., Becker, B., & Beatty, D. (2005). The workforce scorecard: Managing human capital to execute strategy. Boston: Harvard Business School Press.

• Workforce Mind-Set and Culture: First, does the workforce understand the strategy, embrace it, and does it have the culture needed to support strategy execution?
• Workforce Competencies: Second, does the workforce, especially in the strategically important or “A” positions, have the skills it needs to execute strategy? (“A” positions are those job categories most vital to the company’s success.)
• Leadership and Workforce Behaviors: Third, are the leadership team and workforce consistently behaving in a way that will lead to attaining the company’s key strategic objectives?
• Workforce Success: Fourth, has the workforce achieved the key strategic objectives for the business? If the organization can answer “yes” to the first three elements, then the answer should be yes here as well.Huselid, M.A., Beatty, R.W., & Becker, B.E (2005, December). “A players” or “A positions”? The strategic logic of workforce management. Harvard Business Review.

Figure 16.10

The HR Balanced Scorecard bridges HR best practices and the firm’s comprehensive Balanced Scorecard.