Rewards and Satisfaction

When it comes to rewards, quantity and mix are the key factors in determining whether people are satisfied. As you might imagine, the general rule is that the more rewards people receive, the more satisfied they are. However, some quirks of human nature come into play here. People’s degree of satisfaction can change rapidly. For example, a basketball player who signs a record-setting contract of x million dollars may be very satisfied until another player signs one for x + y million dollars.

On the few occasions when a reward amount exceeds what individuals think is fair, they can even feel guilty about being overrewarded. However, it appears that feelings of being over-rewarded are short lived. Most people quickly rationalize the excess and decide that they are, in fact, fairly paid. This phenomenon is quite visible in CEOs who somehow get over the guilt of multimillion-dollar bonuses even when their company is losing money. In contrast, when individuals feel underrewarded, they do not skillfully rationalize the shortfall and decide it is fair. Instead they complain and try to get more.

How can organizations understand the standards against which their people measure rewards? The answer comes from research indicating that people set up standards by comparing what they receive to what similar people are getting. Individuals determine who these “similar others” are according to a variety of factors: performance, type of work, training, background, and other characteristics.

For comparison purposes, people are likely to look at those characteristics that they think are their strengths. For example, if they are well educated, they compare themselves to other people with a similar level of education, and they think that education should be a major criterion in determining reward levels. If they perceive themselves to be high performers, as most do, they tend to compare their rewards with the rewards of other high performers and of course are strong advocates of basing rewards on performance.

The reward comparisons that individuals make can sometimes appear to be irrational. For example, executives who are highly paid compared to other executives within their firm sometimes look at other organizations in order to find people who are paid more. And if they are in the difficult position of not finding other executives who are paid more, they look elsewhere, comparing their reward level to that of star athletes and entertainers.

Time and time again, we have heard CEOs say, “Well, I’m worth at least as much as Shaquille O’Neal or Tom Cruise.” A more valid comparison would be to compare their pay with that of Shaquille O’Neal’s coach or with that of Tom Cruise’s business manager. These would be much better comparisons from the perspectives of work content and skills. But CEOs compare themselves to O’Neal and Cruise not because of the similarity of their work or skills but because they are using high rates of compensation as their comparison factor.

Reward mix is important because individuals value a variety of intrinsic and extrinsic rewards. What is an attractive and satisfying package of rewards for one person may not be for another. A clear implication of this that was mentioned in Chapter Six is that b2change organizations need to be sure that the reward packages they provide fit the type of workforce they need to attract and retain. Offering job security and a rich retirement package, for example, is the wrong way for them to go.

Because organizations clearly can influence satisfaction, it is well within the reach of b2change organizations to satisfy most, if not all, of the employees they want to retain. “All” it takes is a reward system that fits the new rules. It is also very useful to have an information system that measures employee satisfaction and perceptions of fairness, thus enabling the organization to assess and adjust how well the reward system is working.

One of the great challenges in satisfying employees is achieving alignment between what they value and what the organization can offer. As was noted earlier, individuals differ in what they value. Even though a good selection process can help homogenize an organization’s workforce, there are always going to be differences among employees. Further, individuals and their needs change over time; thus the diversity in what people want from work increases when some people stay in an organization for a long time and others enter.

“Cafeteria” or flexible reward systems that allow for choice can help with the diversity problem but cannot solve it completely. There will always be some dissatisfied employees, and there will usually be more in an organization that is changing. The way to judge whether dissatisfaction is a problem is to look at whether valuable employees are leaving and how the level of dissatisfaction compares to the level in other organizations.

Turnover and Satisfaction

Research on turnover suggests that when people search for another job, they go through a mostly rational decision process in which they compare what a new job might be like to their current situation.² However, they are not always accurate in assessing what a new situation will be like, nor are they necessarily accurate in assessing what their future might be like with their current employer. Nevertheless, they weigh the pluses and minuses of their options as they perceive them, and leave or stay on that basis.

The challenge every organization faces is creating an attractive work situation for the individuals that it wants to retain. The challenge is greater in a b2change organization, because it cannot guarantee the same kind of job security traditionally offered in career-oriented organizations. This is even true for core employees because they have to be willing and able to change to maintain their employment. Organizations that are designed to change must therefore rely on such things as interesting and challenging work, new opportunities, and financial rewards. This brings us right back to the importance of the selection process, as described in Chapter Six. Get the selection criteria wrong and you will not be able to offer what employees value, and you will end up with damaging levels of turnover.

Turnover Management

One of the defining characteristics of an organization that is ready and able to change is that it is able to alter the skill mix of its human capital. As we have already discussed, one way to do this is through training and development; the other is to replace existing employees with new ones. For either of these approaches to work effectively, organizations need to be able to measure the skill and performance levels of all their employees. As we discussed in Chapter Five, organizations need to develop performance management systems that do this. They then need to make good decisions about whom to keep and whom to let go in order to support dynamic alignment.

It is one thing to say that poor performers and individuals with obsolete skills should be terminated; it is quite another to do this effectively. But a high-performance b2change organization must do it. Keeping employees whose skills are irrelevant to the current mission is a poor use of corporate resources, just as is keeping poor performers. Both practices send the wrong message to other employees: that they don’t need to perform.

Helen Handfield-Jones, one of the authors of The War for Talent, has argued that managers need to be given targets for how many employees to terminate.³ She points out that without the discipline enforced by specific targets, managers will take the easy route and say, “All my guys are pretty good.” It was this kind of thinking that led Jack Welch to enforce his infamous ranking system in which those in the bottom 10 percent are marked for termination.⁴ This approach seems to have worked for GE, but as we noted in Chapter Five, we cannot recommend it.

What we recommend is that firms take very seriously the task of pruning their talent; experience shows that if they don’t, it just won’t happen. One approach is to force managers to answer the question, “If you did have to lay off some people, whom would you let go?” This makes managers focus their attention and leads naturally to the decision point, “Should we let any of those people go?”

Notice that there is a difference in flavor between how traditional firms and b2change firms think about terminations. In traditional firms, managers are looking to cut deadwood (which should always bring to mind the question, “Did you hire them dead, or did you kill them?”). In b2change firms, managers should be looking to see if the talent they have is still aligned with the changing needs of the firm. The discipline of enforcing appropriate levels of turnover is an important part of the discipline of revisiting and implementing strategy.

Measuring Human Capital

Strategies for retaining and developing human capital need to be built on a solid foundation of metrics. This is true for both traditional and b2change firms, but it is especially true for b2change organizations. There are two obvious reasons why metrics are fundamental to having a strategy-driven approach to managing human capital. First, without measures it is almost impossible to make strategic judgments about how to allocate and develop talent. Second, what is measured tends to take on a greater importance than what is not.

Particularly if human capital metrics are used to evaluate performance and determine rewards, they tend to become very important. Individuals worry about the accuracy of the measures as well as how their own performance is reflected in those metrics. When the condition of human capital is not measured, it almost inevitably ends up as a secondary consideration relative to those things that are measured and rewarded. Even if the condition of human capital is recognized as an important influence on other metrics, such as profits or sales, the failure to measure it is a negative. It creates a situation where human capital management is seen as a nice to do, rather than as critical to organizational effectiveness.

Human capital management must begin with measures of the condition of individual employees. Measurement at this level is the foundation that is required in order for an organization to develop overall indicators of the condition of its human capital. We began our discussion of performance management systems in Chapter Five; at this point we need to return to it.

Managing Skills and Competencies

There are three main reasons that b2change organizations should have an effective performance management system. As will be discussed in Chapters Nine and Ten, it should be the foundation of the organization’s reward system. It also is critical to the validation of selection systems—recruiters need to know how their hires have worked out. The third and perhaps most important reason is that it is a building block for managing human capital.

As we noted in Chapter Five, everyone has seen dysfunctional performance management systems. They become dysfunctional because they are complex systems to design and operate, and they require skilled managers and employees to operate effectively. Nevertheless, an effective performance management system is vital to the management of human capital in a b2change organization.

Effective measurement of the skills and competencies of individuals is fundamental to the kind of task assignments that we discussed in Chapter Four. Good assignments are tougher to achieve in a b2change firm because there is a lot more movement of tasks and people. Traditional firms can put someone in a job and if after a year or two it isn’t working out, they can consider moving the person. B2change organizations cannot waste that kind of time. They need to continually assign people to tasks at which they will perform well. It’s not about putting people in the right job; it’s about putting them on the right teams and the right projects.

Measuring skills and competencies is also fundamental to assessing the strategic capability of an organization and to making decisions about what strategies to pursue. B2change organizations should have a skill and competency profile for each individual. Obviously this requires the type of IT-based HR system that is offered by Oracle and SAP.

Developing Person Descriptions

To manage the development and management of individuals in most knowledge-work roles and managerial roles, b2change organizations need to develop a person description for every employee. It needs to specify what knowledge and skills the individual has and should develop. It should be combined with and based on a role description that specifies the tasks to be performed by the individual and the performance level required. (This role description should be a living document updated by the individual and his or her manager, not HR.)

The person description should be used as the basis for determining whether the individual has the necessary work-related skills and knowledge to fill a role, and as the fundamental building block of development and staffing activities. All organizations can improve their talent management by having person descriptions, but in b2change organizations they are not just nice to have—they are a necessity. Without them it is impossible to make good data-based decisions about change. Recognizing this, SAS, the statistical software company, uses person descriptions as the foundation of a program that enables their managers to determine the gap between the skills they currently have in their departments and the skills they need in the future.

The person description must capture the specific behaviors a person needs to master and not just deal in generalities. For example, instead of saying merely that the person needs to have communication skills, the person description should specify exactly what kind of communication the individual needs to engage in, as well as what level of mastery is required.

The person description should establish measures that distinguish between successful and unsuccessful mastery so that individuals can be certified as having the necessary communication skills. A version of these same measures should be used to assess ongoing job performance, but that is not what we are talking about here. In a person description, the focus is on what a person can do rather than on how well he or she actually performs on a day-to-day basis.

As a general rule, there are three areas of skill and knowledge on which each person description should focus. The first is the set of technical skills that are needed to do the role they are assigned. The skills for someone in HR are likely to be radically different from those for someone in engineering. In both cases certain functional or discipline-specific knowledge must be mastered; the needed level of expertise depends on the kind of work the individual is likely to be assigned. Knowledge is often best identified and assessed by specialists in the area of expertise and is often very specific to the core competencies of the organization.

The second area of knowledge pertains to the business model of the organization—that is, its financial measures and business strategy and how these relate to the work that employees do. To master this area of knowledge, employees in b2change organizations need to understand things about the marketplace, competitors, and, of course, the organization’s financial model and measures. Again, the depth and kind of knowledge needed will vary from one work role to another.

The third area in which employees need specific knowledge and skills involves organizing, leading, and managing. The content of this area is shaped by the management approach and design of the organization. B2change organizations that use teams, for example, need individuals to develop good team skills and communication skills. As we will discuss in the next chapter, those who are expected to lead the organization clearly need to be evaluated on their leadership skills and their ability to communicate a sense of mission and vision.

A good example of an organization that has developed person descriptions is Fiat. The company has defined three types of knowledge that everyone in the organization needs to master, as well as seven types that are specific to the fundamental professional areas and business processes in which an individual works. The three general knowledge areas are (1) the company and its business, (2) the management practices of the company, and (3) the operations and economics of the business. The seven types of basic professional knowledge are defined in detail by each business unit and the functional areas in Fiat and are based on the area of professional knowledge that is the focus of each individual’s work. For example, in marketing and sales, Fiat identifies knowledge concerning sales networks and channels, competitive market structure, and three other general areas as being important parts of the knowledge base.

Hallmark is another company that has spent considerable time and effort developing person descriptions. It has composed success profiles, which it uses to identify each individual’s knowledge and skills, focusing on the specific skills needed for that person’s position. The company uses a competency assessment worksheet to establish development objectives, which are ultimately used for performance appraisals as well.

Perhaps the best way to demonstrate what a person description contains is to show one. Exhibit 7.1 illustrates an example from a publishing company of the development part of the description for a manager. It is backed up by definitions and the identification of specific behaviors and results.

Using Human Capital Metrics

What kind of summary human capital metrics should b2change organizations collect and use for the purposes of development, work assignment, and strategy development? There is no definitive list, but a number of basic measures have been identified in the literature on balanced scorecards and human capital.⁵

The measurement of human capital should start with metrics that focus on the skills and competencies of the workforce. A good example of the power of metrics is provided by Six Sigma programs. They measure and report on the skill level of the workforce in terms of quality (for example, the number of “black belts”). This serves to measure how far along an organization is toward having a quality capability and to motivate individuals to become quality experts. A b2change organization might do well to borrow the concept of karate belts and to identify the critical abilities of change-ready managers: rapid relationship building, quick learning, and strategic focus.

Metrics also need to be developed to measure the presence of technical skills that support core competencies. These metrics can help guide strategy development as well as indicate what is needed for an organization to execute its strategy.

Turnover is an obvious measure because the cost of turnover is anywhere from two times monthly pay up to twenty or more times, depending on the scarcity of the skill in the labor market and the learning time to become proficient. Because the b2change firm may actively pursue a certain level of turnover, this measure should distinguish between wanted and unwanted turnover.

Of course, once good people have left, it is too late to do anything about it, so, as was mentioned earlier, human capital metrics in b2change organizations should include measures of employee attitudes. Most good-quality attitude surveys ask employees not only how satisfied they are with their job but also whether they intend to leave. Clearly these measures, particularly the measure of intention to leave, tend to be highly correlated with later turnover behavior. By collecting attitude data, it is possible to intervene in situations where undesirable turnover is likely to occur. It is also important to measure motivation, involvement, and identity. They are good indicators of future performance and a good way to test how the organization design is affecting individuals.

Other human capital metrics that are frequently used include success in hiring and the amount of time required to fill open positions. These are obviously critical metrics and ones that make sense for b2change organizations.

Although metrics in the area of staff development require subjective judgments, they are very important in a b2change organization. Measures are needed that focus on how many individuals are in development positions and how many backups are available for critical positions.

Looking at development metrics is particularly important for b2change organizations that are committed to developing their existing employees. They must emphasize and measure career movement and continued development. If they don’t provide development opportunities, they will find it very difficult to retain individuals who enjoy learning, developing, and changing their work and skills.

Finally, b2change organizations need to measure their investment in training. At the most basic level, they need to measure the number of days of training, the cost of training, and the type of training, but this often is not enough. Where possible, it is desirable to look at the impact of training on individual and organizational performance. This is particularly critical in an organization that is changing, because information about the impact of training can be very useful in making decisions about whether to travel light and buy employees who already have skills or to make the investment in training and developing existing employees.

Even though there is not yet a standard list of “must-have” human capital metrics, b2change organizations can and in most cases should develop a human capital report or scorecard. This human capital report should use a mix of the kinds of measures we have just discussed and display data for the organization’s major units, parts, and groups. Creating these scorecards enables an organization to assess not only its current performance capabilities but also its readiness to develop new and different organizational capabilities and core competencies.

Targeting Critical Work and Individuals

It is inevitable that some kinds of work and some individuals will have a disproportionate impact on the success of an organization. The most important are usually those activities and individuals who are critical to the organization’s core competencies and organizational capabilities. B2change organizations clearly need to put in place practices that ensure the retention and development of individuals who do a critical kind of work or have critical skills.⁶

Retention Strategies

Retaining the right individuals requires being in close touch with the external labor market and being able to change the amount and perhaps the type of rewards for individuals as the market changes. It also requires a clear focus on the strategic needs of the business and attending to the satisfaction, development, and rewards—financial and otherwise of key employees.

With respect to core employees, promising a “soft landing” in the event of future layoffs can facilitate retention. In today’s environment, individuals take a considerable risk when they stay at a particular organization for a long time. Thus they need to be assured that the organization will support their transition to a new situation if they no longer fit where they are.

In many cases, retaining and motivating core employees in a b2change organization requires developing in them an organizational ownership mentality. They are the ones who must make the extra effort to see that the organization is doing well and adapting to important changes in the environment. At times they need to put their own interests aside to further organizational performance and change. In the absence of a loyalty contract, an organization cannot reasonably expect this kind of behavior from individuals who do not share in its long-term financial success. Thus, as will be discussed further in Chapter Ten, it is particularly important that core employees own stock and have stock options. It may also make sense to give them formal employment contracts.

The career path of high-potential individuals warrants special attention. P&G has done this by identifying certain “crucible” jobs that provide excellent development opportunities for individuals targeted to develop into general managers. The company pays careful attention to how these jobs are filled and to the development of the individuals who hold them. Why? Because crucible jobs are scarce commodities, and the firm needs to pay careful attention to them to see that they are used effectively to develop the critical human capital of the firm.

Notice how much this approach differs from traditional thinking, which calls for programs aimed at the whole employee population or at different levels of management. B2change organizations need to be keenly aware of what activities and competencies are critical to the execution of the present strategy, and also need to think one or two steps ahead. That is, b2change organizations need to create programs that will prepare the organization for a strategy change.

Critical Skills

What determines which individuals should be considered core and receive special attention? Clearly labor supply and demand are critical factors. When labor is scarce, it makes particular sense to focus on the retention of individuals who are in scarce supply. Losing them is particularly painful because the replacement costs are high, and continued churn in a technical specialty or business unit can lead to poor organizational performance.

The second consideration is the relationship between how well a set of activities is performed and the performance of the organization. There are some areas in most organizations where the performance of the individual is strongly related to the overall performance of the organization. This is clearly true of many of an organization’s senior management positions, but it may not be limited to just those roles. For example, individuals in an R&D lab can come up with breakthroughs that have an enormous impact on the corporation; at a more mundane level, a particular person may deliver a critical service to a customer.

Our colleague John Boudreau points to the example of Federal Express. Analysis there shows that the performance of FedEx route drivers is particularly critical to organizational performance. Drivers are the primary interface with customers, and the decisions they make about waiting for packages and servicing a customer are strongly related to customer retention. In addition, their ability to arrive at airports and distribution points on time is critical to the timely delivery of packages and to customer satisfaction.

Less strongly related to customer satisfaction and organizational results is the performance of FedEx pilots. Although they are skilled and certainly valued professionals, there is little variance in the job performance of pilots. All of them are able to perform within very narrow parameters of effective behavior; therefore improving their performance will have relatively little impact on the overall effectiveness of the organization. This suggests that focusing on the development and retention of route drivers is likely to have a much bigger payoff than focusing on pilot performance.

Changes in Criticality

One of the more challenging aspects of managing human capital is that when organizations or their environments change, individuals and jobs may move into and out of a position of criticality. The toy manufacturing business is a good example. A number of years ago, a sales position in a toy company was an important position, but not necessarily a critical one. The salespeople dealt with a number of different retailers, and although the retailers were demanding, each retailer had relatively little impact on the effectiveness of the company overall.

Today the situation is dramatically different. A few large chains, most notably Wal-Mart and Target, dominate the toy business in the United States. Individuals in toy companies like Mattel and Hasbro who manage the relationships with these big chains are now in critical positions. If they make an error in their relationships, it can have a devastating effect on their company’s performance. The implication of this change is obvious. The sales position needs to be much more of a focus with respect to human capital development and retention.

Creating Career Opportunities

One of the best ways to retain individuals who seek out change and like to develop their skills is to provide them with internal development opportunities. This can help a b2change organization fill critical vacancies, and functions as a retention and motivating device for just the kind of employees that a b2change organization needs. A b2change organization that is committed to development therefore needs to have internal systems that support individuals who want to make development moves.

We have studied many organizations where employees complain that it is easier to get a job with another company than it is to move internally within their own company. There are a number of reasons for this, including poor information about where job openings are and all the political issues that are involved with internal moves.

All too often, managers want to retain all their employees, because that reduces their need to train and develop people. Internal moves have costs associated with them just as turnover has. Because of this, supervisors often don’t nominate their employees for new jobs and may even keep their most effective employees a closely guarded secret.

One obvious answer to the problem of supervisors’ hoarding good employees is to reward managers for developing their employees. More and more organizations have adopted this policy, but it is still relatively rare. It should not be rare in a b2change organization. Supporting the internal movement of people is just the kind of practice that is necessary to build a workforce that is ready to change.

The information problem, with respect to employee movement, can be solved relatively easily with the development of a company-based eHR system. In the best systems, individuals throughout an organization can use the intranet to quickly identify the openings that are available and also the kinds of skills and competencies that are required for these positions.

BP is one of a growing number of large companies that have an HR system that posts their job openings on their intranet. BP’s system was developed as a part of their outsourcing HR to Hewitt. It allows employees to see job openings worldwide and goes into great detail about the employment conditions associated with the jobs.

With a good competency-based HR system, employees can compare the competency mix that is required in an open position to their skill mix and decide whether it is worth their while to apply for the it. With more advanced eHR systems, such as BP’s, individuals can look at any special conditions that are associated with the move; for example, if it is an international move, they can look at how it will affect their pay, benefits, and a host of other issues that might be on their mind. If they decide to apply for the position, they can do it online and open communications with the person who is in charge of filling the position.

IBM is another company that has created an impressive intranet set of HR tools, the On-Demand Workplace, to help individuals manage their careers. One tool, called the Opportunity Marketplace, helps IBM employees find jobs that fit them. It contains a series of self-assessment tools accessible through the company’s HR portal.

By using the Opportunity Marketplace, workers can establish their skills, competencies, work preferences, and educational backgrounds. They can then look at more than five hundred specific jobs in IBM and see how their skills and competencies match these jobs. The system can automatically match a skilled employee with the needs of a hiring manager. If employees so desire, they can request a notification via email of the openings that correspond with their skill sets, and the system can alert managers as to key individuals at IBM who fit the skill set needed to fill an opening in their area.

IBM’s human capital database also allows managers seeking employees to search by keywords. For example, if a manager needs to find somebody with expertise in a certain kind of business who is located in a particular country and can speak a particular language, all he or she needs to do is enter three or four keywords and hit the search button, and a list of all the possible people across IBM comes up. Data about each of the individuals include contact information as well as the person’s complete qualifications, background, and career history within IBM.

The Opportunity Marketplace tool also helps IBM assess the human capital balances and imbalances in various parts of the company. It lets managers know if they lack employees with a particular skill or have a surplus. A possible next step for IBM’s system would be to make it available to external job applicants. This could greatly improve the recruiting process. External job candidates could evaluate their skills and discover what openings at IBM exist that fit their skills.

The IBM system doesn’t stop with assessment. It also includes a learning tool that can create customized learning paths for employees based on their career aspirations and gaps in their skills. The system automatically recommends courses and learning opportunities; a side benefit is that employees are regularly reminded of the importance of learning. Many of these courses are delivered by e-learning; currently more than half of all of IBM’s training is done through e-learning. The IBM system is just what b2change organizations that take a commitment-to-development approach need because it speeds up changes in the skills of the workforce and ensures that the workforce’s existing skills are utilized. Indeed, the availability of this type of system should make it possible for more b2change organizations to take a development approach.

Overall, having an effective means of managing the internal movement and development of people is critical to attracting and retaining the kind of change-oriented individuals b2change organizations need. Without it, people who enjoy change, learning, and development will inevitably migrate to other organizations. Individuals who like change usually prefer to actively manage their own careers. Organizations that want to be change-ready don’t need to take over the management of these people’s careers. Quite to the contrary—these individuals might find the loss of control oppressive.

What organizations do need to do is support an individual’s development of his or her career within the organization. To truly develop, the person ultimately may have to leave the organization, but that should be because the organization is no longer a good fit, not because he or she did not receive support for development.

Managing Layoffs and Downsizing

Reducing staff is a high-risk action for an organization, but some b2change organizations need to do it, particularly those that are built to travel light. When carelessly decided on or indiscriminately managed, layoffs and downsizing can ruin a company’s brand, damage its culture in ways that make the people who remain less productive, result in the loss of significant knowledge and social capital, and be major triggers of death spirals. In many ways, layoffs are more crucial to an organization’s reputation for treating people right than initial hiring decisions.

Many organizations simply overreact to downturns in their business. A growing body of evidence says that organizations tend to eliminate too many people in times of economic distress, incurring long-term costs that are often far greater than the short-term savings.⁷ These costs include losing people who are not easily rehired when the economic downturn is over; losing people who are critical to important organizational capabilities and core competencies; losing social capital, which is found in the relationships and implicit knowledge that former employees have; and causing existing employees to lose faith in the company and its management, resulting in turnover among the remaining employees when the labor market improves.

Most organizations see downsizing as a cost-cutting measure. In a b2change firm, downsizing is about adjusting capabilities—something that should be done with a clear sense of identity, strategic intent, and knowledge of one’s existing capabilities. All the points we made in earlier chapters about building strategy and using information systems to learn about human capital come into play here. Strategy and information should guide any major human capital decision, downsizing being a particularly poignant example.

Clearly it is foolish to argue against all staff reductions in a b2change organization. Sometimes layoffs and downsizing are necessary for a variety of good reasons: when strategy changes, a restructuring may be needed to bring in different skills; an economic downturn can force reductions; sometimes building a new core competency can be accomplished only by recruiting new employees.

But there are significant advantages to not downsizing or doing only a little of it. For example, in an economic downturn, it may be possible to grab market share from competitors who overreduce their staff. This is particularly true if competitors lose their ability to serve their customers well or if they are in a poor position to recover when the downturn is over. B2change organizations that have a commitment-to-development strategy can also use a period of downturn to develop new products or to improve employees’ skills and knowledge.

Overall, staff reductions should be used by b2change organizations only as a last resort, after weighing the many other less disruptive options that can be used to reduce labor costs, including the following:

• Voluntary leaves
• Shorter working hours
• Pay reductions
• Delayed start dates for new hires
• Cutting back on the use of temporary employees
• Shortened workweeks
• Reduced bonus and variable pay amounts
• Reduced benefits and extras

If involuntary reductions are necessary, it is critical that the senior management of a b2change organization make a strong case for them as the only practical alternative under the prevailing business conditions. This should not be difficult if management and employees have a good understanding of the nature of the business, the economic condition of the industry, and the status of the organization. All of these should exist in a b2change organization if it has a history of transparency and communication. Needless to say, this understanding should be built before downsizing or any other major change is needed.

A b2change organization must handle downsizing in ways that fully support its existing identity and employment brand. Many companies follow the traditional method of selecting individuals for layoffs based on seniority, but this does not fit the b2change approach. Seniority-based layoffs often mean that some of the best employees will be lost, thus diminishing the organization’s ability to perform.

As specified in a b2change organization’s contingency employment contract (see Chapter Six), staff reductions should be based on performance and skills. Here we have yet one more reason why b2change organizations need to have well-functioning talent management and performance management systems. Without them it is impossible to make good staff reduction decisions.

Some of the best practices we have seen in managing layoffs occurred in technology firms during the dot-com downturn. For example, Cisco paid employees part of their salaries if they went to work for volunteer organizations or contributed their time to public service. Other organizations paid tuition for laid-off employees so that they could improve their knowledge and be ready to reenter the organization at a later date with better skills and a positive attitude toward the company.

Developing a Training Strategy

When traditional organizations do training and development, it usually is based on looking at existing jobs and analyzing the skills people need to do them. It is assumed that a person’s job and perhaps career path should dictate the kinds of skills and knowledge the person needs to learn. Thus most of the training and development done by organizations is focused on preparing people to do their current jobs and possibly their next one or two. Often organizations mandate training and put people on predetermined career paths. This approach to training works well when organizations can predict what jobs will be like, but this approach does not fit b2change organizations that are committed to development.

Does change mean that companies should not invest in the development of their people? No, that would be an overreaction, but it does suggest that b2change organizations need to take a very different approach toward training—an approach that is founded on two premises.

The first is that a b2change organization is simply not in a position to make many decisions about what people should learn and how they can be optimally positioned for employment in the future. The best that a b2change firm can do is provide its employees with information about what is happening within its walls, what its business strategy is, and what kind of technical areas and core competencies it anticipates it will need in the future.

As a general rule, a b2change organization should not direct individuals to learn certain skills and competencies. Yes, there may be some instances where an organization should require people to learn essential skills the company knows it requires (for example, how to use an intranet HR system), but in general a b2change organization should not take responsibility for the long-term development of most or all of its people. This is obvious in a travel-light organization but also true of a commitment-to-development organization.

This first premise gives rise to a second. People in a b2change organization need to be responsible for making their own decisions about what they learn and how they develop their careers. A b2change organization is responsible for providing them with information about what new skills are likely to be needed in the future and perhaps a chance to learn those skills, but for the most part, people must make their own choices about what skills to develop and how to develop them. They need to be responsible for their own careers and employability.

When all is said and done, people are usually in a better position to manage their careers than are the organizations they work for. If they are not in a better position, they need to get there. In our view, career self-management will increasingly become the model on which all organizations—not just b2change organizations—and people fashion relationships in the future.

A b2change organization cannot employ people simply because they are loyal. It needs people whose skills and abilities fit the firm’s ever-changing strategies. Mobility needs to be more than a buzzword; it needs to be a new reality. Given this reality, the b2change organization needs to do what it can to support its employees’ being employable, but as a general rule it should not promise something it cannot deliver—namely, a career.

Use Just-in-Time Training

Even b2change organizations that travel light need to use targeted “just-in-time” training. This type of training is focused on content that people need to do their current job and that is delivered when they need the skills. In today’s world, just-in-time training is often needed for new hires as part of their on-boarding process, as well as for current employees, who may need to update their skills when a new approach to technology, customer service, budgets, or some other management system affects the area in which they work. One major advantage of just-in-time training is that it fits well with when adults learn best—that is, when they need to solve a problem and when the training they receive addresses a specific issue on which they need to work.

The best performance management systems build training in. They provide every employee with a recommended training curriculum. In one company we worked with the vast majority of the recommended courses are available on the intranet and can be taken when they are needed. They include a training program that focuses on using the performance management system. This program contains online testing, which certifies employees as capable of using the system. In the case of the performance management system, employees are required to pass a test on how the system operates.

Reward Learning

Rewards are a great motivator that can inspire people to learn and to accept change. As will be discussed further in Chapter Ten, developing a skill-based pay system that rewards employees for learning new skills can motivate them to learn more quickly and thus enable b2change organizations to change more quickly. It is a particularly good fit for b2change organizations that adopt a commitment-to-development approach. Rewarding specific learning also helps retain employees; it shows people that the organization is committed to their development and also raises their compensation level so that they are less likely to be attracted to another job.

Rewarding general learning, as opposed to job-specific skills, is difficult to justify in many situations. However, if a b2change organization takes a commitment-to-development approach, it may be a good practice.

United Technologies Corporation (UTC) has a program that supports its approach. UTC wants to establish a culture of learning and education and to create the best-educated workforce in the world. To accomplish this objective, UTC has created an employee-scholar program that encourages employees to get a university degree—associate, bachelor’s, or advanced. UTC pays for tuition, books, and academic fees and gives employees time off to study. When employees obtain their degree, they are given UTC stock as a graduation reward. One hundred shares of stock are awarded to every employee who achieves a bachelor’s, master’s, or doctoral degree; fifty shares are awarded to everyone who receives an associate degree.

One unusual feature of the UTC program is that it rewards employees even though the courses they take are not related to the work they do or the work of the organization. The rationale for this is that UTC wants to create a knowledgeable, learning-oriented workforce, so its program is designed to do this rather than to develop specific job skills. Given that many of the company’s businesses are in high-tech fields (such as the design of jet engines) that are changing rapidly, it is easy to see the rationale for this strategy.

One can raise legitimate questions, however, as to whether or not the UTC program would be even more effective if it targeted the specific skills individuals need either to do their work or to build the organization’s capabilities. This is particularly true when you take into account the cost of the program, $60 million a year.

Two rationales justify spending money to support general skill development in a b2change organization. First, offering a significant reward for completing a degree can be an effective approach to retention. At the very minimum, people will stay with the company until they complete their degree—and often longer out of a feeling of wanting to pay back the company that helped them. This practice may also help the company retain the right kind of employees: learning-oriented individuals.

Second, supporting general learning can reinforce a learning culture throughout the organization. This is especially important in technology companies whose workers must constantly update their skills and abilities. UTC, for example, profits from the halo effect created by rewarding employees who earn degrees for general skill development; their learning tends to create a companywide culture that values and appreciates learning and change in all its forms.

Admittedly, many organizations do not accept the arguments in favor of general learning. For example, SAS, the software firm that is often mentioned as one of the best places to work, takes a narrow approach to development, rewarding people only for learning skills directly applicable to SAS work. SAS does not reward its employees for earning an M.B.A. It regards an M.B.A. as a mobility degree that often leads to posteducation turnover. This policy is consistent with the company’s employment contract, which is based on a long-term, somewhat paternalistic relationship with its employees.

Conclusion

The management of human capital is a complicated task, even in an organization that faces a stable environment. It is much more complex when the environment changes and the organization then needs to change its strategy, competencies, and capabilities. There is no substitute for systems that effectively manage staffing and the development of employees; they are critical to the success of all b2change organizations. Effective systems can be developed only if senior management assigns a top priority to the ongoing management of human capital.

There are no magic bullets that can ensure that a b2change organization has the right approach to managing its human capital. There are, however, some practices that are generally effective. These include careful attention to the satisfaction level of employees, because it has a strong impact on turnover; careful analysis of which individuals and jobs are critical to the organization; and the strategic, at times almost surgical, use of training and development opportunities.