Retirement Age, What Retirement Age?

Friday, October 29, 2010

Most western industrialized nations are facing an aging workforce. In Germany it is estimated that by 2020 the proportion of the workforce over 65 will represent almost 22% of that nation's workforce. In the US, it is expected that Americans 65 and older will account for approximately 16% of the nation’s population within the next 10 years.  Forbes.com reports that by 2010, US workers aged 55 to 64 will account for 52%, half, of the US’s workforce. Furthermore, Forbes reports that many of these workers are not ready or planning to retire anytime soon. Which is both good and bad news for US employers.

The good news is that many of the highly trained, skilled and hard working “baby boomers” will remain in the workforce and with increased longevity will continue to make significant contributions over the next decade.  The bad news is that as those same “boomer” do exit the workforce organizations will be forced to find large numbers of replacements. It is estimated that over the next decade some 76 million baby boomers could potentially retire. This will place an increasing strain on employers as they struggle to find replacements for every level of employee from the factory floor to the C-Suite.

One challenge for organizations will be the management and integration of several generations of workers. As baby boomers remain in the workforce, due to either desire or necessity, employers will find that workers from up to four generational segments will interact with each other on an increasing frequency.  While this interaction has the potential for conflict, it also has the potential for significant synergies if these mutli-generational segments are properly managed and incented.  What incented my father, my older brother or my younger sister may not be what motivates me. To understand how each generational segment integrates and interacts, managers will need to be trained on their differences and similarities.

Consider that each generation has been shaped by their social, political, economic, and technological surroundings as they matured and entered the workforce. While there is often a tendency to focus on the differences between generations, they all share several common threads:

Benefits: what is considered “good” or “important” benefits may differ.

Wages: how each is rewarded may vary but each expects to be rewarded.

Security: what constitutes “job security” will depend on who the worker is.

High Performance Provider Networks and HDHP

Monday, November 29, 2010

Although high performance provider networks may be found in conjunction with any form of health care plans, they are most effective when linked to a High Deductible Health Care Plans (HDHP). Since consumers are on point to spend a significant amount of their own moneys as a HDHP member to obtain health care, it becomes imperative that they get the best care possible for the lowest cost possible. If the organization’s goal is to move increasing numbers of its employees to a HDHP, current members must be able to show that their experiences were highly positive. This applies to both the treatment received and the long-term financial impact. Current HDHP members are not going to support continued participation if they do not receive effective and efficient health care if it lacks quality.

Increasingly provider networks are being rated on their use if best medical practices and evidenced based medicine. From a layman’s point of view, best medical practices and evidenced based medicine may be defined as the standardization of medical diagnosis and treatments practices to optimize outcomes and recoveries based on documented results and substantiation.

Harvard Medical School offers a continuing education course titled,: “Best Medical Practices: Maximizing Skills, Minimizing Risk”. The two-day seminar included topics on state-of-the-art diagnosis and treatment, safety and effectiveness, patient communication skills and medical malpractice.  The national Blue Cross and Blue Shield Association maintains “Blue Distinction designations” as a means to identify and designate those medical “facilities that have demonstrated a commitment to quality care by meeting objective, evidence-based thresholds for clinical quality and safety developed with input from expert clinicians and leading professional organizations.” Blue Distinction centers focus on:

•Bariatric Surgery

•Cardiac Care

•Complex and Rare Cancers

•Knee and Hip Replacement

•Spine Surgery

•Transplants

In January 2009, Cigna reported on the use of “more than 300 evidence-based measures of health care quality” to evaluate the effectiveness of over 400,000 Cinga members in its HDHPO, HMO, and PPO plans. Cigna’s conclusion was that adherence to “evidence-based measures” has a positive relationship to both the quatitlty of care and the cost of that care.  The Ohio Association of Health Plans (OAHP), a statewide association of health care plans with more than six million Ohioans, promotes its member plan’s use “of best medical practices” and “delivery of evidence based health care”.

During an October 22, 2010 presentation, Booz & Company, a global management consulting firm, to businesses, governments, and other institutions, identified “Narrow, high performance provider networks” as a “key” capability in the emerging health care industry following health care reform.  The operative word is “narrow”, rather than accepting “any willing provider”, a high performance network accepts only those, which are able to meet and maintain a high degree of professional and medical standards. The result is often a smaller network, yet a network with highly effective and efficient providers practicing medical best practices based on evidence based medical.

Opportunity Costs: Turnover

Wednesday, October 27, 2010

In my career, I have worked for a number of organizations in a number of industries. Most have recognized the value of their organization’s reputation within the community as an employer and the significance of their specific brand, even if that brand includes the color “blue”. Goodwill, in all its forms, is so significant to most organizations that the Financial Accounting Standards Board has issued a rule, Statement of Financial Accounting Standards (SFAS) 142, which provides directions on how to “account” for such intangible assets.

The “value” of Goodwill as an intangible asset is simply the difference between the fair market book value of an organization and price paid by the purchaser. And, since beauty is in the eye of the beholder, so, to some extent is Goodwill.  Goodwill includes items such as the organization’s brand recognition (Coke, IBM, Ford), location (Caesars Palace, Las Vegas), market share (Boeing, Airbus) … etc. As part of overall Goodwill an organization’s community relations, image, and reputation is vital to its ability to acquire financing and attracting and retaining talent. Damage (Impair it) an organization’s community relations, image, and reputation and it may find it increasingly difficult to hire and retain the talent it needs to be successful. Consider the oil spill associated with BP, some otherwise loyal customers might be reluctant to buy from BP gas stations.

In Goldman Sachs' 2010 annual report, it warned current and potential investors about a possible loss of Goodwill. In its statement, Goldman acknowledged that, "Adverse publicity, governmental scrutiny … can also have a negative impact on our reputation and on the morale and performance of our employees, which could adversely affect our businesses and results of operations." Clearly, Goldman was concerned about the loss of Goodwill and in part, its impact on the “morale and performance of [its] employees”. What was the impact on Goldman’s recruiting and hiring efforts? Were there employees who quit out of their concerns for the ongoing viability of the organization? How many applicants elected not to pursue a career with Goldman? Was Goldman forced to spend more on recruiting, offer higher starting salaries or recruit more to overcome a potential loss of Goodwill? Goldman may never know that it lost future organizational leaders due to a loss of something as intangible as Goodwill.

What was the opportunity cost associated with the impairment of Goldman’s Goodwill? As disclosed in its 2009 10-K report to the Securities and Exchange Commission, Goldman reported its total “Goodwill and Identifiable Intangible Assets” for 2008 at $3.523m and for 2009 at $3.543m. We will not know the impairment of Goodwill until the 2010 report is released sometime in 2011. While this may seem like a small amount compared to Goldman’s total assets in the hundreds of billions of dollars, for a small struggling start-up business it might be too large a barrier to overcome.

Organizations with high turnover have a large cadre of former employees who may be impairing its Goodwill. In the same manner that organizations select their employees, job applicants are influenced by the organization’s Goodwill or its lack.

The Impact of Turnover and its Costs

Monday, October 25, 2010

No one doubts either the impact or the cost of turnover to an organization. Even in these times of high unemployment, loss of talented employees can have prolonged and disruptive affects upon the operations of any business. While it is often appropriate to separate voluntary from involuntary turnover, the impact to an organization’s operations with an already reduced staff has a significant and negative impact, regardless of the reason. Traditional thinking often marginalizes the voluntary separation of an employee who marries, stays home to care for a new child, joins the military or whose spouse is transferred to another city. Nevertheless, the loss of a talented employee, voluntarily or involuntarily, creates a void, which will require time to replace and incur both real and opportunity costs.

In October 2010, the U.S. Bureau of Labor Statistics (BLS) reported that 15.3 million US workers were unemployed in September 2009. In that same news release, the BLS reported that 14.8 million workers were unemployed in October 2009, a decline of 500,000 workers.  According to current data available from the BLS, voluntary separations (quits) account for approximately 40% of all separations. A July 2010 news release from the BLS reported that of the total separations from January 2010 through May 2010, 8.8 million were voluntary vs.11.4 million were involuntary.

The economic, social, and political affects of both voluntarily and involuntarily separations are clearly significant for both private and public organizations. While the impact of staff separations upon a single business’ operations may vary from organization to organization and industry to industry, measuring that impact can be difficult. Both real and opportunity costs have to be considered when attempting to calculate the organization’s total cost.

Real Costs                                Opportunity Cost
Recruiting Costs                        Loss of Customer Goodwill
Hiring Bonus                              Lowered Staff Morale
Relocation Expenses                  Loss of Proprietarily Knowledge
Onboarding Costs                       Disruption of Service Delivery
Training Cost                              Loss of Market Position
Temporary STaff Expenses          Loss of Investor Creditability
Erosion of Customer Base

It may not be possible to eliminate every separation; in fact, there are indications that a certain amount of turnover is even essential to the growth and development of a strong organization. When assets, human or otherwise are not performing, it is reasonable to expect that those assets will be recycled. This happens in businesses, investment portfolios, and sports teams.

A January 2007 study by Hewitt Associates (now Aon Hewitt) found a strong correlation between the performance of an organization and the level of the organization’s talent. So much so, that in Hewitt’s study of 1,000 organizations, ”Results showed that the flow of pivotal employees – defined as employees in the top quartile of their peers in pay progression – into and out of an organization is a strong predictor of changes in Cash Flow Return on Investment (CFROI[1]) and shareholder value.”  While most organizations would agree that better organizational performance is related to the talent of its human capital, selecting, developing, and retaining that talent is a challenge for all organizations.

Retaining Technology Staff in Small and Start-Up Organizations

Thursday, October 21, 2010

I recently had lunch with a new HR manager in a two-year-old start-up technology organization whose primary space was tele-communications. During the discussions, it was clear that this organization, like many small companies, was struggling with their ability to attract talented technicians and engineers and retain them from moving on to the greener fields of large multi-national tele-communications firms. Small start-up firms are often on shoestring budgets, lack the internal advancement opportunities of large organizations, and may have questionable and short-lived futures. Such organization may seek to hire new graduates in the hope of gaining the latest in technology only to see those same individuals siphoned off to the large stable firms at twice the salary. Of course, this issue not only applies to technicians and engineers but to most occupations in high demand with many start-up organizations.

In a case study of the CTAE Aerospace Research and Technology Centre, by J. de Dalmau, A. Dal Canton, G. García-Cuadrado, and E. Chester, J. Fuentes, in February 2008, the authors addressed the issues of attracting and retaining human talent through a number of organizational programs. Among those were “outreach and promotion” to attract talented individuals, “collaboration” with technical training schools, social networks, web-based tools, internships, and sponsorship of professional events.

Consider the use of outreach and promotional programs as a way of letting college seniors or recent graduate know that your organization exists and is engaged a new, innovative, challenging work, and research that will lead to a breakthrough in the next novel technology. Certainly, there are a number of ways this can be accomplished, e.g., have your top technology leader address engineering classes, host open houses at your facilities, have a new employee and recent graduate share their experiences with engineering students, and there are a host of opportunities with social media and networking. Think of outreach and promotional programs as a way to “prime the pump” for fulfill the talent pipeline.

One possibility for collaboration is joint research and development projects between your organization and a technology or engineering school in which some portion of the research and development work is performed by senior and graduate level advanced students overseen by a university faculty member. You will be able to preview the skills of individual students and ascertain the quality of the school’s programs and facilities. There may even be opportunities to fund a portion of your organization’s research and development through public or private grants.

Many senior and graduate level students and recent graduates seek out paid internships as a means of gaining valuable on-the-job experience. However, for organizations that are on shoestring budgets, an alternative could be an “unpaid” internship. During this time when entry-level jobs are difficult to find, many recent graduates would be willing to accept an unpaid internship as a means of displaying their talent and skills. You will be able to preview individual and there is something to be said about an individual who would accept the risk of an unpaid role in return for the possibility of a full time job. These unpaid internships might be coupled with graduate level courses for additional credit. Furthermore, such unpaid internships could earn the organization significant goodwill and community support.

Many organizations attend on campus career days where they and a few dozen other companies vie for the attention of senior level students and recent graduates. Technology or engineering graduates are in short supply, so your organization is competing with others is a hostile environment, the college career center. However, what might be more productive is to host an off campus event specifically directed at senior level and graduate students in your narrow field of interests. That way you would not have to deal with majors outside your area, or compete for the attention of students with other technology or engineering originations. This more intimate and focused environment would allow you to build a one-on-one relationship with the talent you might want to interview for your organization.

Paid Time off Program Design Trends

Monday, October 18, 2010

Depending on the organization’s PTO program design features, employees may be required to use 100% of their accrued PTO time within the current program year of forfeit any un-used balances. The goal is to manage how much time an employee accumulates to avoid extremely large balances. Unfortunately, the employee may be left with a gap of unpaid time during a period of an illness, injury or pro-longed family emergency. Clearly, the organization must balance the competitive need to have a PTO program and the costs associated with paying for pro-longed periods with accrued PTO balances. One interesting alternative is to allow the employee to rollover some or all of the employee’s expiring PTO balances into their Defined Contribution plan.

In two Revenue Rulings, 2009-31 and 2009-32, the IRS indicates that it would be acceptable to amend an organization’s 401(k) plan to allow un-used PTO time that would otherwise expire at the end of the current plan year to be rolled into the employee’s account.

“Annual paid time off contributions. This ruling provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of an employee’s unused paid time off under the employer’s paid time off plan. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a contribution (including a section 401(k) contribution) or cash out of the unused paid time off, determined as of the end of the plan year (December 31). Rev. Rul. 2009-31 is companion guidance to Rev. Rul. 2009-32 and is part of the “Savings Initiative’ guidance issued by the Service. “

“Paid time off contributions at termination of employment. This ruling provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a post-severance contribution (including a section 401(k) contribution) or cash out of the accumulated and unused paid time off. Rev. Rul. 2009-32 is companion guidance to Rev. Rul. 2009-31 and is part of the “Savings Initiative” guidance issued by the Service.”

While this feature may not be attractive to every organization, it does provide an alternative to simply allowing un-used PTO to expire at the end of the year or when an employee terminates from employment. As with any situation involving the deferral of income in the present time carries with it significant restrictions. All conventional 40(k) limits apply and deferral election must be made in advance of the actual deduction occurring. Both Rev. Rul. 2009-31 and 2009-32 provide several examples of situations in which all or part of the employee’s unused PTO is deferred into the organization’s 401(k). As to be expected, both the 401(k) and PTO plans must be amended prior to deferrals taking place.

As with the design, amendment, administration, and operations of tax qualified plans such as 401(k)’s, organizations should always seek professional and credentialed account, tax, and legal advice prior to implementing any changes.

Paid Time Off Program Features

Friday, October 15, 2010

What are some of the typical features found in many PTO programs?

PTO programs usually contain a fixed number of hours or days, which the employee may use for either vacation or sick time.  In most cases, the employer is not concerned with the purpose of the time off only that the employee obtains prior approval for the time off from their manager.  In other programs, organizationally observed holidays are also included in the PTO bank.  Occasionally organizations will require the employee to use PTO time for bereavement and jury duty.  This could have a negative effect if the employee lacks PTO time to cover missed time, forcing the employee to go without pay for that day.  But then the employee is supposed to “manage” their time.    The determining factor as to what time is to be included in the PTO bank is a function of the needs, culture, and competitors of the organization.

Is there a single PTO program for all employees? Executives, managers, professionals, production, maintenance, full time, part time or casual.  A PTO program that works well for hourly production workers may not work well for executives.  A PTO program for full time employees may not be suitable for part time or casual employees.  A PTO program that works well in the corporate office, may not work well in shipping if there are fluctuating or seasonal workloads.

PTO program policies need to be clearly written to ensure that management and employees alike understand the features and when and how the time can be requested and used.  If need be, the organization may need to stipulate a minimum number of days of advance notice for time off requests.  Except for emergencies, it would be reasonable to require 24, 48 or 72 hours of advance notice.  Even in cases of planned medical and dental appointments, it would be reasonable to require 24, 48 or 72 hours of advance notice.

PTO policies need to indicate how PTO time is used.  Can it be combined with an organizational holiday?  Are there periods during the year that PTO cannot be used except in the case of an emergency? Can multiple employees within the same department be off at the same time?  When competing PTO requests are received by a manager, how are the requested approved or denied?  Does seniority play a role in deciding who and when PTO is granted?  Can PTO be sold or bought?  Can PTO be loaned to another employee who has run out of time?  Are there restrictions on using PTO in conjunction with overtime?  At what rate is PTO paid for employees on shift differentials?  How is PTO paid for an employee who works 3, 10 or 12-hour shifts in a workweek?  Is PTO considered covered compensation for pension and retirement plan accruals and matching?  What happens to earned PTO when the employee terminates?

How much time will the employee accrue?  Will it be based on service?  How are re-hired employees to be treated?  Is there a waiting period prior to PTO being earned for a new hire?  Is there a waiting period before a new hired employee can use their PTO?  Is there a minimum and maximum amount of PTO that can be requested at any given time?

As will any employee compensation and benefits program, early and sustained communications is essential to providing for a smooth transition from a traditional paid time program to a PTO arrangement.  Employees should receive an initial accounting of their current PTO balance and how their old time off balances were converted.  The simplest approach is to post it to the employee’s check or deposit advice stub each pay period.  If employees are provided with an annual statement of their benefits, it should be posted on that report.

Paid Time Off Banks

Tuesday, October 12, 2010

While neither a new nor a novel concept, Paid Time Off Banks (PTO) are one way to address the frustration of dealing with separate accumulators for vacation, sick, and occasional time off needs. Consider the employee who has exhausted their vacation time but still needs time off, which does not fit into the sick time category. Therefore, what happens, they call in sick for a day or two to deal with some personal issue. Now the organizational has an employee who has technical abused the company’s sick leave policy by “falsely” declaring they were sick, when in fact they were not. Does this happen, of course, it happens, even in the best of managed companies. Clearly, the employee feels compelled to take the time off, and clearly, the employee is willing to technical break the company’s policy. Paid Time Off Banks removes the need to silo times into buckets, which require excessive managerial control while providing no flexibility.

As with any employee benefits program, there is a need to balance the requirements of the employer and employee. As an employer, I need employees to come to work, stay at work, and focus on the work of my company. As an employee, I have to deal with sick children, an elderly parent, an ill spouse, and my own healthcare. I also have to deal with parent-teacher conferences, time to re-charge and refresh my physiological, emotional, and metal state of mind. Traditional vacation, sick time, holidays, and personal days off allocate time into separate and indivual buckets. Often time from one bucket cannot be used for the purposes of another bucket, e.g., sick and vacation time usually do not interchange. So, employees are forced to abuse the system by inappropriately misusing time from one bucket. They run out of vacation or personal days ands use suck time instead. In the long run the employee actually use more time that necessary.

How do you know if a PTO program is right for your organization? Is there real or perceived time off abuse in your organization? Does your organization work non-regular schedules such as a hospital, nursing home or educational facility? Are employees asking for exceptions to vacation, sick leave, holiday, and other time off policies?  PTO programs provide employees with flexibility while allowing employers to control how much time used and under what conditions, without micro managing the reason for the absence.

Another advantage of PTO programs is they help to manage unscheduled time off. PTO programs do not give the employee free license to take time off without first obtaining approval. Nothing prevents the organization from requiring that time off has to be pre-scheduled and pre-approved, except for emergencies.

Furthermore, employees are expected to manage their time off within the allocated limits, just like traditional time off processes. If the employee uses all of their time in the PTO bank there are just as much out of time as in a traditional time off program. The difference is that the employee is not compelled to falsify the reason they want off. In fact, most PTO systems do not require a reason, merely managerial approval to take the time and have the accrued time av available to take.

Moreover, at least one California court, the Court of Appeal for the First District of California ruled that use of partial paid days off did not “jeopardize” an employee FLSA exempt status.

Lastly, PTO is normally accrued on a period-by-period basis rather than being granted as a lump sum block on January 1 of each year. Thus, the employee is required to manage their time to ensure that sufficient time is available for a one-week vacation or a 5-day recovery following outpatient surgery. Since the time is accrued, when the employee terminates, the employer is only paying out the earned time and not the entire 2 or 3 weeks.

Peer-to-Peer 360 Performance Reviews

Saturday, October 09, 2010

A number of organizations have adopted the practice of some form of peer to peer 360 performance reviews in an effort to obtain a better balance to employee performance assessments. Unhappy with rater bias, underperforming employees and managers, organization perceive that if the employee is reviewed by their peers, their contacts, and others; underperforming employees and managers will be rooted out.

The concept is rather simple, co-workers, as well as upstream and downstream reports, and general organizational contacts (and sometimes even external client contacts) are provided with some opportunity to evaluate and give feedback to the employee. This can take the form of an automated system, which maps the employee relative to their on-level peers and those above and below the individual. It also can be no more complicated than the traditional 8 ½ by 11 inch rating form with a fixed 3, 5, 7 or 10-point scale.

Supporters of peer-to-peer 360 performance reviews point out that a review based on the one-sided input of a single manager has the ability to both over and understate the talents of the employee being reviewed. Since managers are subject to the same human prejudices that all of us are, a single rater can allow their biases to overcome their better judgment. Other issues may enter the review such as the Recency Effect where an employee’s manager focuses on the most recent actions good or bad of the employee and ignores the rest of the evaluation period. Often in managing professional, technical or scientific staffs, managers may not see the full scope of their subordinates’ knowledge, skills, and abilities. Furthmore, managers may not have the same level of technical knowledge or the sufficient details of the assignment in order to evaluate the employee’s performance.

On the counter point, organizations who have taken care to develop and promote well-trained managers build their training programs to eliminate the negative issues of a single rater. A single rater is less likely to fall prey to Group Think, although a rater may be influenced by the opinions of another. One reason for the manager’s roles is to “manage” the performance of their subordinates. Managers are generally the closest role to employees and are in the best position to observe to performance of their employees. Certainly even in the absence of a formal peer-to-peer 360 performance review system, managers are provided with feedback on the performance of their employees.

Whether a specific organization has or does not have a peer-to-peer 360-performance review system or a single rater is a function of the needs, real or perceived of that organization at that point in time. As with humans, organizations are apt to “try” something new for no other reason that they can.

Employee Performance Review

Wednesday, October 06, 2010

It is almost impossible to disagree with the concept of evaluating employee job performance through some review process. Programs such as Pay for Performance, Merit Pay, and Paying for Results have taken on religious like qualities and are strongly defended as essential to the ongoing success of their parent organizations. Regardless of what kind of organization is employing these reward systems, private vs. public, for profit vs. not for profit, large vs. small or service vs. manufacturing; they all perceive their system is working for them. Their fundamental mantra is the linkage between the needs of the organization, the individual meeting those needs, the success of the organization and ultimately, the success of the individual.

Take for example the “Training Objectives” introduction of the Office of Personnel Management’s guide for “Senior Employee Pay for Performance”,

… understand both the philosophy and mechanics of their performance and pay systems

… understand the required linkage between individual and organizational performance and its effect on ratings

… establish and clearly communicate the relationship between overall organizational performance, specific results and individual ratings in discussions with their subordinate executives to dispel any perceptions of forced distribution or quotas

The message is very clear, link individual performance with the organization’s performance, simple enough for the U.S. Federal government or any organization, public or private. In order for the employee to archive their goals, i.e., higher pay, higher position, or prestige, … etc., there has to be a quid pro quo arrangement. The employee gives the organization the desired level of knowledge, skills, abilities directed at the organization’s issue of the day and does that for 5, 10, 15, 20 plus years, and the organization rewards the employee with higher pay, higher position, or prestige, … etc. So evaluating employee performance is just a matter of determining whether the employee succeeded in meeting the organizational needs … or is it?

Consider the sales representative “A” who sold $10 million worth of the company’s product vs. sales representative “B” who sold only $1 million. Who is the better performing employee? “A” is of course. What if I now tell you that 50% of A’s clients defaulted on their credit arrangements, 100% of A’s clients will never do business with the company again, and on 25% of the sales the company actual lost money. Who is the better employee? Is it “B”? You will not know until you compare the performance of “A” and “B” using the same factors of performance.

Employee performance evaluation is a complex endeavor. It is relativity easy to put together a few questions with a 3, 5, 7 or 10-point scale and say that it measures performance. It is another mater to pay for performance. Would you pay for A’s performance?

Organizational Reluctance to Adopt Behavioral Change Techniques

Sunday, October 03, 2010

I have always been amazed that each organization in which I have been employed has had its own distinct culture. Furthermore, I have been dumbfounded at the reluctance of those same organizations to change even in the face of strong evidence that their current culture is a major impediment to their future success. Even when organizations have acquired a completely new management team in the “C” suite, change can not only be difficult, it can sometimes impossible. Consider a large $1 billion bank I worked for located in the mid south and surrounded by a vast oil producing economy for the better part of the 1930’s to the 1960’s. By the mid 1980’s however, much of the oil had been removed and while still an important part of the regional economy, oil was no longer the major force it once was. Nevertheless, the marketing philosophy of the bank was a continued focus on the few clients connected with oil and the supporting industries associated with oil production. At the same, it ignored new businesses that had entered the area including an auto manufacturing plant, national trucking and transportation organizations, a larger military base, the city’s emergence as a regional medical center, and the spread of consumer banking.

General Motors is often quoted as an illustration of organizational inertia. Even after it recognized productivity issues between itself and its Japanese competitors in the late 1970’s and even after it entered into a joint venture with Toyota, GM failed to adopt world-class production methods. In the 1980’s, while Chrysler and Ford were making significant productivity gains, GM became less productive.  Ironically, many of the productivity and quality control measures put in place by the likes of Toyota were originally developed by W. Edwards Deming and his cohorts during World War II in an effort to defeat the Japanese. After the war, Deming went to Japan to help them rebuild their war torn industrial base. So some of the very same techniques GM used to support war production from 1941 to 1945 were shared with that very adversary, which then became one of GM’s prime competitors.

In their 2005 paper titled, “The Red Queen, Success Bias, and Organizational Inertia”, William P. Barnett and Elizabeth G. Pontikes, argue that, “… significant change especially disrupts well-developed organizations, those that have established the roles, routines, know-how, structures, and technologies necessary to perform certain kinds of activity”. Can it be that change is threatening? Yes, it is virtually part of human nature to be threatened by change, especially organizational change. Will I lose my job, be demoted, lose my corner office, parking space, will I have to relocate or report to some new jerk down the hall? With change comes the unknown. Even small changes can create an unnerving feeling that something is just not right.  Chen-Yi Tsaia, Julia L. Linb, and Shih-Chieh Fangc state that organizations are continuously changing as they respond to threats while at the same time they are resisting change. This in turn creates a “Paradox of threat” in which some threats are “real” while others are only “perceived”.

Dave Edwards, college union director, California Polytechnic State University writing for the January, 2007 Bulletin, a publication of the Association of the College Union International points out the number “1” in his “5½ things leaders must know about proactive change management”, is “Communicate, communicate, communicate!” And his number 5 ½ on his list is “Communicate more!”

Clearly for an organization to survive, it must change, however, it must collectively overcome the threat, real or perceived that exists in the eyes of everyone from the corporate office to the loading dock. I have often been privy to debates on what, when, how, and how much to culminate. Usually my organizations have under estimated the workforce’s ability to handle frank and honest communications. The result being that greater mis-trust was generated due to a lack of communications. Unfortunately, by the time the organization realized what damage was it is often too late.

Variable Pay and the Role of Motivation

Friday, October 01, 2010

Why are variable pay plans more effective at linking employee behavior with specific organizational goals than traditional merit or bonus plans? Many organizational assume that employees are “motivated” by the likelihood of some type of “reward”. Anecdotally, many organizations perceive that the desired reward is tangible or extrinsic in nature, e.g., money, a private office, rank, club memberships … etc.

Victor Vroom (Yale, School of Management) argues that an employee’s behavior is altered when that employee perceives that they will be rewarded for their behavior. Vroom (along with Lawler and Porter) believes that the basis for employee behavior is tied directly to the employee’s knowledge, skill, ability, personality, and prior experiences. Vroom’s Expectancy Theory sees an employee’s behavior as far more complex than say Pavlov or Skinner, as such the reward system required to shape the desired employee behavior and achieve the desired outcome, must also be more complex than a simple bonus plan.

To paraphrase, “What is one person’s motivation is another person’s de-motivation.” Many organizations believe that ALL employees are motivated by money. If I just pay enough money to the “right” employees, I will achieve my goal of the top performing design, manufacturing, sales or service organization. I once worked for a large ($1 billion) southern commercial bank. As our position was eroded by competitor’s we elected to hire very high priced marketing, trust, and leading officers from the major banking centers in Texas. Afterwards, we learned that such individuals were really focused on reaching the major banks in Chicago and New York. Our billion-dollar bank was merely a short-lived stepping-stone in their career plan. At the same time, we overlooked the local long-term employees who knew our markets, our clients, and had established relationships. Not only did we fail to motivate our high priced new talent to transform a 150-year-old organization into a modern regional financial powerhouse, we succeed in de-motivating our current talent as well and ultimately the bank was sold to a junior organization in an a joining state.

Determining what and how to motivate a single employee or a group of employees is no easy task. Administratively, it is often impractical to design a reward system for an individual employee except in extremely small groups. In one organization I worked for, we designed a variable pay plan for our location managers around net operating margin. While each location had a separate target value, the key metric was still operating income after expenses. The plan contained a degree of discretion. Should a significant change occur in the management of the location, marketplace competitors, the legal environment or the economy; the organization’s management had the ability to alter the plan’s parameters. As part of the plan, the managers of our 60 plus locations were treated to several days of award (rewards) presentations, spa treatments, golf outings, gifts, and meals. This annual “director’s conference” had been held for many years. During these conferences, location managers were recognized for attainment of their specific goals, both with financial and non-financial rewards. In addition, financial rewards were provided to the non-management administrative staff of the location in recognition of their contributions towards goal attainment.

How can an organization’s management provide for an environment that stimulates employee motivation? If different employees are motivated by different rewards, how does an organization identify these reward factors? The simple answer is to survey the organization’s workforce as to what rewards are important to the employees, collectively. I once surveyed a sample group of approximately 4,000 part-time nurses and applied health care workers as to what would “motivate” them to work more hours. Prior to the survey, the organization’s management argued that respondents wanted more money. However, the survey indicated that the majority of the respondents desired paid time off in exchange for working more hours.  The following year I re-sampled the same employee group and got the same answer, “paid-time off”.  In the end, the organization’s management elected to take no action with regard to either increased pay rates or paid-time off.