• Home
• »
• Focus

• Home
• Executive Jobs
• Features
  • Focus
  • Career Couch
  • Radar
  • Water Cooler
  • Insight
  • Podcasts
• Place an executive ad

In today's ruthlessly competitive corporate environment, chief executives are totally focused on shareholder value. They never miss a chance to make an extra buck. That's what they keep telling us, but don't be too sure it's true.

According to Jeffrey Pfeffer, a professor of organisational behaviour at Stanford Graduate School of Business, many companies are, in that great economists' buzz-phrase, "leaving money on the table".

In a paper published last year in the Journal Of Economic Perspectives, Pfeffer argues many firms are failing to adopt human resource management practices that research has shown would improve their financial performance.

"A truly enormous body of research from a number of countries shows that how people are managed affects quality, profitability, productivity and total return to shareholders," he says.

So what are these "high-commitment" work arrangements that do so much to improve the bottom line?

Pfeffer nominates five practices that experts in organisational behaviour agree make a big difference:

* Investment in training to develop skills and knowledge.
* Sharing of information so that people can understand the business and have the data to make better judgments about what to do and how to do it.
* Decentralised decision-making and self-managed teams that permit trained and motivated employees to actually influence decisions about work.
* Rewards dependent on individual but also group and organisational performance.
* A regime of mutual commitment and employment security with expectations of a long-term employment relationship.

A lot of those practices aren't exactly flavour-of-the-month with the present breed of super-macho CEOs. So what makes those practices so effective in improving the productivity and discretionary effort of employees?

There are three basic principles. First, people are social creatures and so are concerned with their relationships with others and are influenced by what others say and do. As a result, individual workers' perceptions, preferences and attitudes are at least partly formed by their relationships. And people derive an important part of their social identity through their affiliations.

Second, people are concerned about fairness - both the fairness of what people end up with and the fairness of the processes by which those outcomes are determined.

Third, companies are themselves social institutions that are influenced by other institutions and imitate other institutions, partly to achieve legitimacy by acting like or looking like others and partly to conform to social expectations and norms.

Now let's see how those three principles explain the importance of the five high-commitment work arrangements.

Training improves performance by building skills and competence. It also activates a basic human instinct observed in every culture: reciprocity.

"If an employer has invested in an employee, that employee will feel some obligation to reciprocate that investment with greater effort and commitment," Pfeffer says. "This sense of obligation will be particularly strong when training is not expected because of industry custom or the level of the employee."

Information sharing provides people with the data needed to make better work-related decisions. Sharing information with another party signifies trust. That trust is likely to be reciprocated.

In contrast, when a company keeps secrets from its employees, it signals it doesn't trust its employees to keep secrets or to use the withheld information effectively. These feelings of distrust and disdain are also likely to be reciprocated.

Decentralised decision-making permits people to use information and training to enhance the effectiveness of what they do by allowing them the necessary discretion to adapt their work processes. It also signals trust and a belief in employees' competence, again engaging the norm of reciprocity. Decentralising decisions to self-managed teams further engages the power of social relations in the workplace.

"People may disappoint their supervisor or 'the company', but they are much less likely to let down their fellow employees when they are working together as a team."

Turning to monetary rewards, the idea of fairness implies that individuals expect to benefit when their efforts improve the economic performance of their employers. Dissatisfaction arises when employees have given up wages and benefits, company financial results have later improved, but senior management and shareholders, rather than employees, have enjoyed virtually all the benefits of the improvement.

Differently rewarding individuals creates distinctions among people, thereby increasing social distance, and can produce perceptions of unfair treatment. So rewarding group performance through schemes such as profit-sharing or share ownership will create fewer problems than rewarding individuals.

As for employment security, the human obsession with reciprocity means that, in the absence of companies making long-term commitments to their workforce, that workforce isn't likely to take a long-term view of its attachment to the firm or feel much loyalty to it.

Layoffs arising from "restructuring" often create among the survivors feelings of guilt, depression, reduced satisfaction and commitment to the job. Hardly surprising, then, that layoffs frequently fail to increase share price, profitability or any other measure of company performance.

But if these five "high-commitment" practices are so effective, why aren't they applied more often? Why are money-driven CEOs leaving money on the table?

Well, not because the practices are too costly. If they're as profitable as the research suggests, any extra cost is obviously worth it. Often, however, they can appear too costly simply because the cost of wages, employee benefits and training are easily and regularly measured, whereas the gains made from reduced turnover, higher levels of trust and engagement, reduced absenteeism and more discretionary effort typically aren't measured at all - even though they're built into the bottom line.

A second reason firms leave money on the table is because they tend to copy what other firms do. They do things the way the industry does them. So if it's become fashionable to treat your employees badly, every CEO wants to behave the way he thinks he's supposed to.

A third factor explaining the way companies behave is power. The decline of the union movement has reduced a countervailing power - and with it the influence of human resources departments - whereas the sharemarket and its analysts have greatly increased their influence over public companies. And financial-market types - perhaps because they're so overpaid themselves - take a dim view of "soft" treatment of workers.

Finally, top managers tend to assume that employees are "self-interested" (motivated purely by money), engage in "self-interest seeking with guile" (are sneaky) and are "effort averse" (lazy), meaning they need monetary incentives and close monitoring to make them work.

Why do managers think this? Perhaps because they've been misled by the economists' model, or perhaps because they imagine all workers are like they are.